Saturday, January 24, 2009

How We Think About Market Fluctuations - by Warren Buffett

This article was extracted from Warren Buffett's letters to Berkshire Hathaway's shareholders in 1997. It's available at :


A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

For shareholders of Berkshire who do not expect to sell, the choice is even clearer. To begin with, our owners are automatically saving even if they spend every dime they personally earn: Berkshire "saves" for them by retaining all earnings, thereafter using these savings to purchase businesses and securities. Clearly, the more cheaply we make these buys, the more profitable our owners' indirect savings program will be.

Furthermore, through Berkshire you own major positions in companies that consistently repurchase their shares. The benefits that these programs supply us grow as prices fall: When stock prices are low, the funds that an investee spends on repurchases increase our ownership of that company by a greater amount than is the case when prices are higher. For example, the repurchases that Coca-Cola, The Washington Post and Wells Fargo made in past years at very low prices benefitted Berkshire far more than do today's repurchases, made at loftier prices.

At the end of every year, about 97% of Berkshire's shares are held by the same investors who owned them at the start of the year. That makes them savers. They should therefore rejoice when markets decline and allow both us and our investees to deploy funds more advantageously.

So smile when you read a headline that says "Investors lose as market falls." Edit it in your mind to "Disinvestors lose as market falls -- but investors gain." Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other. (As they say in golf matches: "Every putt makes someone happy.")

We gained enormously from the low prices placed on many equities and businesses in the 1970s and 1980s. Markets that then were hostile to investment transients were friendly to those taking up permanent residence. In recent years, the actions we took in those decades have been validated, but we have found few new opportunities. In its role as a corporate "saver," Berkshire continually looks for ways to sensibly deploy capital, but it may be some time before we find opportunities that get us truly excited.

Friday, January 23, 2009

One-on-One with Warren Buffett by Nightly Business Report

Warren Buffett sat down recently for a taped interview with Susie Gharib of Nightly Business Report to mark the PBS program's 30th anniverary on 22nd January 2009.

Video of the complete 24-minute conversation has been posted on the program's website.

Transcript of that entire interview available as a PDF download.

Some of the excerpts of the interview:

Buffett: We’ve spent a lot of money. We’ve got money left, but I love spending money. Cash makes me very unhappy. I like to always have enough and never way more than enough, but I always want to have enough. So we would never go below $10 billion of cash at Berkshire. We’re in the insurance business - we got a lot of things. We’re never going to depend on the kindness of strangers. But anything excess in that, I love the idea of buying things and the cheaper they get, the better I like it.

Buffett: I am unquestionably optimistic about the long-term. I’m more than a little pessimistic about the short-term, but that doesn’t mean I am pessimistic about the stock market. We bought stocks today. If you tell me the economy is going to be terrible for 12 months, pick a number, and then if I find something that is attractive today, I am going to buy it today. I am not going to wait and hope that it sells cheaper six months from now. Because who knows when stocks will hit a low or a high? Nobody knows that. All you know is whether you’re getting enough for your money or not.

Buffett: Well, I’ve learned my lessons before that. I read a book, what is it, almost 60 years ago, roughly, called The Intelligent Investor, and I really learned all I needed to know about investing from that book, and particularly chapters 8 and 20. So I haven’t changed anything since. I see different.

GHARIB: Graham and Dodd?

BUFFETT: Well, that was Ben Graham’s book The Intelligent Investor. Graham and Dodd goes back even before that, which was important, very important. But, you know, you don’t change your philosophy, assuming you think have a sound one. And I picked up, I didn’t figure it out myself, I learned it from Ben Graham. But I got a framework for investing which I put in place back in 1950, roughly, and that framework is the framework I use now. I see different ways to apply it from time to time, but that is the framework.

GHARIB: Can you describe what it is? I mean, what is your most important investment lesson?

BUFFETT: The most important investment lesson is to look at a stock as a piece of a business, not as some little thing that jiggles up and down, or that people recommend, or people talk about earnings being up next quarter, something like that. But to look at it as a business and evaluate it as a business. If you don’t know enough to evaluate it as a business, you don’t know enough to buy it. And if you do know enough to evaluate it as a business and it's selling cheap, you buy it and you don’t worry about what it does next week, next month, or next year.

GHARIB: So if we asked for your investment advice back in 1979, back when Nightly Business Report first got started, would it be any different than what you would say today?

BUFFETT: Not at all. If you’d ask the same questions, you’d have gotten the same answers.

Thursday, January 22, 2009

Gambling or Investing is about Odds & Probability

I was watching this movie, The Best Bet in Astro Wah Lai Toi channel the other day, and the villagers are betting whether the main actor, Hor Yi ( played by Michael Tse Tin Wah) would stop gambling or not (since his whole life he have been gambling). The odds are as below:

A) If Hor Yi continues to gamble : Bet 1, Win 1
B) If Hor Yi stops gambling : Bet 1, Win 10

A Gambler might choose either one to bet, which gives him chance of winning, as well as losing. However, given this kind of "odds", there is a risk-free betting. Infact, with a simple tweaking, it becomes a sure win for your bet (regardless of the outcome).

If a person bets RM 1 on both outcome A and B, then that person can't lose. Either he break-even if Hor Yi continues to gamble, or he wins RM 9 (Win RM 10, but lose RM 1 on the other bet) if Hor Yi stops gambling.

Now, if that person changes his bet to
  • Bet RM 5.5 on outcome A above, and
  • Bet RM 1 on outcome B above
The person who bets the way above would 100% win RM 4.5 (from a total investment of RM 6.5) regardless of the outcome (either Hor Yi wins, or Hor Yi losses). This is no longer gambling (or speculating). But it's investing, as long as the person whom you're betting is credible to pay the claims.

My mother used to say that anything that involve winning or losing is gambling. Looking back, I've realised that her statement is very true indeed (though i'm not sure she knows the distinction between investment and speculation when she said that statement). A person who invest the right way, would only have a win, and can't lose (over the long term).

Take for example the Owner of a casino. At a particular table at a particular round, the Banker might lose. However, played over enough rounds, the Banker will almost guarantee themself to a win. Infact, i don't think Genting's Casino ever lose money in their Casino business at any single year (though i can't say the same thing when it comes to days or hours).

Similar post is in the Movie 21 here.

Saturday, January 17, 2009

Why do we compare when we're in school, but not when we're adults?

I was wondering, why do we compare grades/ points/ position when we're in school, but not our Financial Statements when we're adults?

Imagine going through our school days without knowing how we stand against everyone. I believe it'll greatly reduce our chance to get good grades/ to get scholarship or get to University.

If that is so, then shouldn't comparing Financial statements be encouraged so that it'll improve our chance for Retirement? Afterall, more than 85% of the people don't have enough to retire by the time they reach retirement age.

Just some food for thought. Comments/ Reply appreciated.

Monday, January 5, 2009

My Personal Money interview in 2008.

In January 2008’s issue of Personal Money, I was asked about my investing sentiment for 2008, and my answers below might be of interest for review for the entire year of 2008.

Question 1: What is your investing sentiment for 2008. Are you optimism or more guarded? What are the main reasons for your sentiment?
My Answer : Frankly speaking, i don't have any investing sentiment for 2008. I make no attempt to predict how security markets will behave. Successfully forecasting short term price movements is something I think neither me or anyone else can do. However, it is clear that stocks cannot forever outperform their underlying businesses, as they have so dramatically done for some time.

Question 2: What will you be investing in 2008. For example, if staying in equities - will you be looking to acquire more defensive type stocks or buying property or investing outside the country?
My Answer : More than 99% of my assets are invested in these 3 categories (currently, and into the forseeable future) :
a) Bond Funds - For emergency needs, and temporary "parking" for my funds until i can deploy into equities at good price.
b) Equity Unit Trust - For long term capital growth, with minimum time needed to supervise.
c) Direct equity through shares - I consistently search for businesses that are sold below it's intrinsic value. Though it might not happen everytime, but when it does, I might invest up to 40% of my assets in a single security under conditions coupling an extremely high probability that my facts and reasoning are correct with a very low probability that anything could drastically change the underlying value of the investment. Personally, i am willing to trade the pains of substantial short term price variance in exchange for maximisation of long term performance. However, i am not willing to incur risk of substantial permanent capital loss in seeking to better long term performance.

My only foreign equity (excluding Equity Funds) is Berkshire Hathaway, a company which its' CEO and biggest shareholder is Warren Buffett.

Question 3: What other plans would you have for your investing portfolio (e.g. long term objectives or diversifications strategies)
My Answer : Besides what i shared above, i've also does a few things which helps me to achieve financial independence better, safer and faster:
a) Our family does not own any Fixed Deposits. Also, we keep our cash in Savings/ Current Account to a very minimum level. This is because every dollar there, would lose it's value after inflation.
b) At the low rate and the right terms, i'm willing to borrow to invest. But i clear off my credit card balance every month, as i know my investment limitations.
c) We don't focus on how much we earn but on how much we save every month.