Of Pins & Bubbles

Of Pins & Bubbles

A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons. - Warren Buffett

Considering the credentials of the Guru from Omaha, I can't take the chance of disagreeing with the sage all the time.

As enough number of investment gurus have pointed out, bubbles will keep getting formed as long as naive investors are floating around on this planet.

As long as bubbles are in existence, pins will keep searching for them.

On every such occasion when the two meet (I mean the pin and the bubble), inevitably the bubble will burst.

The whole process goes on somewhat along the lines suggested below:

1. The smart investors would have got in there first, ahead of the rest
2. The naive ones would have kept observing the bubble, denying its ever-expanding nature and refrained from getting in
3. Unfortunately, just a few hours / days / weeks before the pin meets the bubble, our naive friends will go right ahead and invest in the bubble, convincing themselves that the bubble "Is different" this time around!
4. And, pray, whom did these naive investors buy the bubble components from?
5. Of course, from the Smart Investors referred to in (1) above!
6. And, the Pin meets the Bubble

Moral of the story:

• We can't do much about bubbles
• We just need to learn our lessons from pins meeting bubbles
• And aspire to become "smart investors" well in time to greet the next bubble.
• And be smart enough AND fearful enough to get the hell out before the next pin meets the next bubble!

Happy investing!

Regards,

N

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Diversification - Warren Buffett's Thoughts on Diversification

Warren Buffett's Thoughts on Diversification

And why I disagree with him for a change!

"Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing" - Warren Buffett

Very interesting quote, indeed.

Specific Disclaimer: I'm not too sure whether this is an authentic quote nor am I aware of the context in which the quote was made.

However, for the limited purpose of this post, I'm assuming the authenticity of the quote and proceeding further.

Obviously, for a given time horizon, if we consider the universe of listed entities on the Bombay or National Stock Exchanges, a specific scrip, let's call it ABC Ltd., will produce the maximum returns and a specific scrip, let's call it XYZ Ltd.,  will destroy the maximum value for its investors. And all the other scrips will have performance levels somewhere within that range.

So, as rightly pointed out by Buffett, it ought to imply that all of us should sell all the rest of our portfolio of longs and go long on ABC Ltd., and, likewise, use our "Short" positions exclusively for XYZ Ltd.

I wish that life is so simple.

Unfortunately, it is not.

Here are a few reasons as to why I disagree with Warren Buffett (and why I prefer diversification any day):

• Nobody can predict the future that precisely.
• Any significant, material, price-sensitive event that has a positive / negative impact on either that stock or that sector or some other stock can swing the price of your stock wildly, thereby throwing your calculations out of the window. Examples abound:
• A sudden Lehman Brothers can deplete the value of some other Financial Giant vis-a-vis a Pharma major, for instance.
• An outbreak of Swine flu or a major Class Action Suit on an unanticipated side effect on a popular drug can impact the price of your favourite Pharma Major either positively or negatively
• Worms in your favourite chocolate or a sudden war in the middle-east can impact the share price of some other Chocolate company or that of an Oil Marketing major.
• If your single golden bullet misses its target, you're in doldrums.
• On the contrary, if you are diversified across sectors, across geographies, across market-caps, etc., chances are bright that no single event is likely to significantly impact your overall portfolio performance - Your portfolio performance is, in that case, more likely to be influenced by your own overall efficiency of analysis, stock picking skills, etc.

Hence do make it a point to keep your portfolio diversified.

At least on this matter, don't listen to Warren Buffett blindly!

Regards,

N

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Copying Ideas from Investment Gurus

Copying Ideas from Investment Gurus

People have asked me often for Investment Ideas, Tips, Suggested scrips, Multibaggers, the works.

I've always wondered about the effectiveness of research reports, tips, recommendations, etc.

The reason: Some work and some don't.

The reason for that: The time horizon, risk appetite, etc. is different for different individuals. And may not synchronise with that of the guy who makes the recommendation.

However, I found an interesting titbit in one of the articles that I read - You can indeed make lots of money by simply copying Warren Buffett blindly - well, almost! Provided, of course, you have the same kind of patience that the Oracle does. And the same kind of time horizon.

The information is very much in the public domain, and can be used effectively by almost any and every investor who cares to do so - No risk of insider trading, no great efforts involved in investment research, a typical lazy man's endeavour!

Do take a look at this gem:

Source: Interview with Mohnish Pabrai by dnaindia.com How much of Warren Buffett's success can be attributed to his investment prowess and how much to the fact that he is Warren Bufett? Well the thing is you could have invested even after Buffett had invested and you could have made six times the money out of it. In fact there are a couple of professors in Ohio, who studied any stock that Warren Buffett bought, AND found something amazing: If you bought on the last day of the month, when it was public that he owned that stock, and you sold it after it was public that he had started selling it, you would have generated north of 20% annual rate of return.

My intuitive guess is that the same kind of "superior returns" must be feasible even by following "Indian Investment Gurus" like Rakesh Jhunjhunwala, for instance.

If any of you have additional data to corroborate or dispute the above hypothesis, do let me know!

Regards,

N

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Thank God for small mercies

Thank God for small mercies

Indeed!

Considering the prevailing atmosphere of extreme fear, it is indeed heartening to note that Warren Buffett appears to have started buying equity again for his personal portfolio. Read on to get reassured:

• http://epaper.timesofindia.com/Repository/ml.asp?Ref=VE9JQ0gvMjAwOC8xMC8yNSNBcjAxNDAx&Mode=HTML&Locale=english-skin-custom

Regards,

N

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Warren Buffett on Leverage

Warren Buffett on Leverage

Here goes a gem from Warren Buffett:

"Leverage," he said, "is the only way a smart guy can go broke … You do smart things, you eventually get very rich. If you do smart things and use leverage and you do one wrong thing along the way, it could wipe you out, because anything times zero is zero. But it's reinforcing when the people around you are doing it successfully, you're doing it successfully, and it's a lot like Cinderella at the ball. The guys look better all the time, the music sounds better, it's more and more fun, you think, 'Why the hell should I leave at a quarter to 12? I'll leave at two minutes to 12.' But the trouble is, there are no clocks on the wall. And everybody thinks they're going to leave at two minutes to 12."

Many of us would wish that we read this (and followed the implied advice) in January 2008!

Regards,

N

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Buffett on Booking Profits

Buffett on Booking Profits

The markets are turbulent. Share prices, as usual, are going up and down like crazy! In the melt-down since January, much of your paper profits have evaporated into thin air. Some of your scrips are still quoting at levels which enable you to get out with some profits. Other scrips are well below your original purchase prices.

What should you do now? Should you sell? If so, which ones? If not, when should you sell?

This has always been a major problem for investors. They get to know what to buy and when - either based on their own research, or based on "expert interviews on TV", "Wonderfully written articles" in business papers, broker recommendations, tips, etc. On the sell side, there's hardly the same quantum of advice available.

Hence, it is worth listening to the ever-green Sage of Omaha:

Warren Buffet, Mr Buy-and-Hold himself, has been known to sell. In a letter to Berkshire Hathaway shareholders in 1987, he wrote: "We are quite content to hold any security indefinitely, so long as the prospective return on equity capital of the underlying business is satisfactory, management is competent and honest, and the market does not overvalue the business."

In other words, he would sell when a holding rises to a price well beyond what he thinks it's worth. He has also been known to sell at a loss to raise money for a potentially more lucrative opportunity.

Becoming fixated on what an investment used to be worth is a loser's game. The money that is gone is gone, and there's nothing you can do about it. Far better, then, to focus on where your investments are now and find the best opportunities for the future.

So, when should you book profits? Ideally, when your investment goals are achieved. If a goal is achieved you should book profits and keep moving.

Hope that this gives you some nice clues on when to sell and what to sell from your wide range of winners & losers!

Regards,

N

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Warren Buffett on Envy

Warren Buffett on Envy

"Of the seven deadly sins, envy is the silliest, because if you have it, you don't feel better. You feel worse. With other sins, you're at least enjoying yourself!" - Warren Buffett

Regards,

N

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