Warren & Charlie

My rules on stocks

The following is my own summary of past mistakes, dos and don’ts…

Do Nots
1. Thou shall not buy and hold an IPO on its first day.
(my lesson from NINE, LFT and GSIT)

2. Thou shall not try to catch a falling knife. (15Oct09) On the other hand, buy on the strength (HUN, BEE).
(my lesson on Nokia, Crocs after bad earning report)

3. Thou shall not average down for an unproven stock. (15Oct09) Bought THQI too early.
(my lesson from SNDA, LFT)

4. Thou shall not bet on earnings.
(Except use option, and bet only lunch money)

5. Thou shall not buy and hold a good stock at bubble price.
(Vanke, China Merchants Bank)

6. Think first about downside and how much downside I can take: PALM (Jan/Feb 2010).

7. Moat, moat, moat (durable competitive edge, or competitive landscape, another lesson from PALM).

7. To be continued…

Reference: my stock lessons (I to VII).

I think I tend to make more mistakes when my account has money: e.g., the LFT buy, not just the loss itself, but taking away my attention from CROX.

My un-scientific rules (from my own exp)
1. Take some money off the table if already up big percentage, don’t be too greed (CROX Oct 31. earning lesson);

2. Swing to lower cost, if bought too high initially, leave some money at the side;

3. A stock needs consistent attention, may turn out to be not good (NINE, CROX); vice versa (MR)

4. Retailer is not as good as wide moat co in the long run (CROX, SBUX vs. K), but how about MCD, exception?

5. Buy the stocks when
5.1 The market is weak (the company fundamental is fine)
5.2 Barron article bashing (CROX in June; recently Berkshire)

6. Sell the stocks when
6.1 People are all excited about it, news media all over it. Couple months ago the top 10 richest Chinese has 6 or 7 from real estate business.

To do
1) Learn more about fundamental analysis, working toward CFA?

2) Be more focus, less emotion,

Buffett’s rule for buying stocks/business, he will only buy a business (some more rules in Chinese here, note most Chinese books about Buffett are no good, the authors did not understand the true spirit of value investing, or only understand it at book level, no practical experience).

1. He can understand (he understands roughly 10% of all business);

2. A business has moat, or durable competitive edge;

3. A good management team (motivated, they work because of passion for the job, not for financial incentives);

4. At an attractive price.

Because his Berkshire empire is so big now, he only looks at bigger companies so that it could have some meaningful impact on BRK top/bottom line. We as small investors don’t have this constraint.

2009 letter to shareholder (PDF)

Berkshire annual meeting minutes (Omaha World Herald, takes a while to load, quote below);

A shareholder asks Buffett to explain his investment strategies, like value investing, and how teach young people. Buffett says he brings in college students to talk with them each year. Buffett says he tells them it is important to know how to value a business and to know how to judge the markets. He says there would be nothing about modern portfolio theory or anything like that. He says it is important to know your circle of competence, start small and learn as you go along. Buffett says some accounting principles also are important. And then learn about market fluctuations and learn that the market is there to serve you. And that is not an issue of a high IQ, but rather an emotional stability and inner peace about the decisions you have made. Munger says there is the basic problem of always having half the future investors in the world in the bottom 50 percent. Munger says largely people should reduce the nonsense. Buffett and Munger agree that emotional makeup is more important than a high IQ. Buffett says he is asked by college students, “what are we being taught that is wrong?” Munger asks how Buffett can handle that question in just one session.

notes (GuruFocus, quote below):

Buffett commented that in 2000 Berkshire’s Stock price was substantially below intrinsic value, that currently the market price is moderately below Intrinsic Value, but not as large a discount as it was in 2000.

Buffett: annual (2008) letter to shareholders

Questions for Warren in this year (2009) annual shareholder meeting
1. Why invest in Utilities? Does not Utilities need a lot of capital, what’s the difference between Utilities and the original Berkshire (textile business)?

2. Why keep American Express and Moody? Don’t we see the permanent demage of consumer credit, and the rating companies? How about Wells Fargo? Why not sell all BAC shares?

3. Derivatives. There are a lot crititics on this, and you have explain this very well in the shareholder letter. But, as I read “Poor Chariles Almanack”, Charile is much more cautious on derivatives, and its systemantic risk (chain effect of credit risk form counter parties).

Buffett on the market
New York Times Op-ed piece (10/17/08): Buy American. I Am.

Buffett article Fortune Magazine 11/10/2001: Warren Buffett on the Stock Market: What’s in the future for investors. This article was co-written with Carol Loomis.

Berkshire SEC filings

Master pieces by Buffett and Munger

Buffett annual letters to shareholders

Buffett Univ. of FL talk (PDF)

Buffett and Munger Q&A on 2008 shareholder meeting (gurufocus); PDF format (source: ValueInvestingResource)

Munger: Annual letters to Wesco Financial shareholders

The art of picking stocks (Charlie Munger)

Human Misjudgement (Charlie Munger)

Poor Charlie’s Almanack: a collections of Charlie Munger’s talk, and words on Charlie from friends/family members.

Poor Charlie's Almanack pic

Charlie Munger articles (collected by Sandman’s Place).

Charlie’s commencement speech at USC (the whole thing is about 2 hours, Charile’s speech is from 43′ to 1:20′)

Buffett Followers (don’t follow them :-)
Carol. J. Loomis/Fortune 02/04/09: Buffett’s metric says it’s time to buy . Carol is a close friend of Buffett and has followed Buffett for a long time.

CNBC Warren Buffett Watch: recently Buffett appeared quite a bit on CNBC, I suspect he does that for two reasons: 1) He enjoys it; 2) To educate the public and do some PR for Berkshire in the bad economy (cheer leader).

Jeff Matthews is maintening a blog titled “I am not making this up”. He wrote heavily on Buffett such as this one. As a matter of fact, he wrote a book “Pilgrimage to Warren Buffett’s Omaha”, in which he shared his thoughts when attending Berkshire annual shareholder meeting, is loosely based on the articles on his blog.

Books on Buffett
Buffett likes to write, although he has not written a book yet. The closest book he authored is this one “The Essays of Warren Buffett: Lessons for Corporate America“, which is a collection of Buffett’s letters to the shareholders of Berkshire Hathaway written over the past few decades that together furnish an enormously valuable informal education.

Warren Buffett essay pic

New: Snowball-Warren-Buffett-Business-Life (Amazon);

Books recommended by Charlie
Psychology book by Robert Cialdini: Influence: Science & Practice (textbook version) ; or this regular version.

Influence Robert Cialdini pic

Chinese version 说服力——说服他人的50个秘密 here.

Influence Chinese version pic

See’s Candy 公司的故事
Buffett annual letter 2008 excerpt (translated by Shanzi): 摘自巴菲特2008年致股东信, 英文全文见:


一起来看一个梦幻企业的典范—-我们的See’s Candy 公司。该公司的经营属盒装巧克力产业。这没什么令人激动的前景,要知道美国的巧克力人均消费非常低而且基本不会增长。许多一度非常重要的品牌已经销声匿迹,在过去40年中只有三家公司赚到了钱。事实上,我相信 See’s Candy的利润几乎占了整个行业的一半,虽然其大部分销售额只来自于几个州。

当Blue Chip Stamps于1972年收购它时,See’s Candy公司的年销售量为1,600万磅糖果。(那时我和查理控制着Blue Chip,后来Berkshire兼并了它)。去年See’s Candy的销售量为3,100万磅,年平均增长率仅为2%。然而(从1972年算)过去50年中,See’s 家族建立了其持久的比较优势,后来Chuck Huggins 和 Brad Kinstler增强了该种优势,从而为Berkshire带来了非凡的成果。

在See’s Candy的销售额为3,000万美元,税前利润不足500万美元时,我们以2,500万美元的价格收购了它。那时候需要投入的运营资金是800万美元。(每年某几个月还需要适度的季节性债务。)因此,该公司资本税前利润率是 60%(500/800). 有两个因素有助于减少需要投入的运营资金。第一,产品销售以现金交易,消除了代收帐款。第二,生产和销售周期短,降低了库存。

去年See’s Candy的销售额为3.83亿美元,税前利润为8,200万美元。现在需要投入的运营资金是4,000万美元。这表明从1972年起我们只要再投资3, 200 万美元就可以实现该公司规模的适度扩大和财务的大量增长。同时税前收入已经达到了13.5亿美元,其中除了3,200万美元用于再投资,其他的都归入 Berkshire(早些年是给了Blue Chip)。在支付了企业所得税后,我们用剩下的钱去买其他有吸引力的公司。就像亚当和夏娃造就了60亿人,See’s Candy给我们带来了新的现金流。(圣经中说的“多产与繁殖”是我们Berkshire认真遵守的一条原则。)

在美国企业界,没有那么多像See’s Candy的公司。通常,公司的利润从500万美元增长到8,200 万美元,需要4亿美元左右的资本投资额。那是因为成长中的企业既有随销售增长而增长的资本需求,也有固定资产投资的大量需要。

需要大量增加资本从而产生营业增长的公司也许可以是成功的投资。与我们的See’s Candy相比, 如果靠4亿美元的有形净资产赚得8,200万元美元税前收入,这也不算失败。但是对所有者来说,那样的投入和产出比例与See’s Candy的情况大大的不同。当然是以少量的注入资本得到不断增长的收入来得更好。不妨问问Microsoft 或Google。

Translated by Shanzi

Fun stuff
Warren Buffett Secret Millionaire’s Club (link here)

My Amazon Store

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