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September, 2016


Warren Buffett, the planet's third wealthiest person and CEO of Berkshire Hathaway, is considered the most successful investor in common stocks and businesses. He is happy to pass along the "secrets" of his achievements, doing so in interviews, articles, and famously as well in his annual reports to shareholders of Berkshire Hathaway. Since Buffett lives in a relatively modest home in NE's biggest city, he has come to be known as "the sage of Omaha." Here, from a recent piece in AARP Magazine,* are ten of his nuggets on how we might all better thrive financially:

1. Keep Cash. Have plenty of reserves available both in case of emergencies or for a downturn in the markets, when this resource will come in handy for buying up equity bargains.

2. Boring Is Beautiful. Look for stock opportunities in companies that have little drama, just keep churning out profits year after year. For instance, Proctor and Gamble makes toilet paper, soap, and diapers. Ho-hum. Yet $1 invested in that company in 1986 would be worth $32 today if dividends were reinvested.

3. A Niche is Nice. Companies that control their markets, as due to brand loyalty, do not need to be concerned much with competition. Customers keep coming back and will pay more for their products: think Coca-Cola and WD-40. Hence higher profit margins.

4. Great Managers Make Money. Warren Buffett points out that a company in which we invest should be good enough to outlive a bad manager, for sooner or later it will have to. However, the combination of a great business with a superb leader is hard to beat, for example, Berkshire Hathaway itself or Apple under Steve Jobs or Microsoft under Bill Gates.

Mark Hirschey photo of Warren Buffett during KU visit 5-6-05 (Wikipedia)
5. Mistakes are Good Mentors. If in the realm of investing we can limit our errors and learn from the ones we do make, they can be beneficial. I recently bought stock in a company that I thought had excellent prospects, only to discover later that it had a lot more debt than I had anticipated, leaving it vulnerable in an economic contraction. The stock has not performed well and so will likely be sold once there is a small profit. By keeping a log of our mistakes and specifically how we went wrong in each case, we may avoid similar blunders in future. We are not perfect. Even Warren Buffett has owned up to costly acquisitions. Yet by limiting our boo-boos we are way ahead in money matters.

6. Focus on Your Strengths. Nobody knows all of the thousands of publicly traded companies. However, most everyone is familiar with some. Maybe we like Starbucks coffee, buy Toyotas or Fords, like the corporation that sold us our home, love Campbell's soups or Nabisco cereals, appreciate Amazon or Apple, adore Hershey's chocolate, find that Humana is a medical insurer that treats us fairly, etc. Companies behind the products and services we use frequently sell shares of common stocks. At times they can be acquired when share prices are low for no particularly good reason. At any given time we may mentally come up with a list of a dozen or two companies we think should do well. They are successful and no doubt have profitable futures. When we note they are available at a discount, we can gradually pick up shares, adding to them over the years as we have additional funds to invest.

7. Purchasing Power Growth Is Good. Look to invest in what has increasing income, but avoid things like precious metals that fail to produce consistent profits and revenue. Many of the companies that have growing purchasing power also provide dividends. This income usually grows over time as well, so that a 3% yield from a great company today may turn into a 20-30% annual yield on one's original investment in 15-25 years or so.

8. Be a Bargain Hunter. The patient investor, like a smart shopper, waits till interesting assets are at reasonable prices. Buffett avoided tech bubble internet and similar stocks that were soaring in the 1990s and so missed much of the sharp decline the stock market saw in the first couple or three years of this century. On the other hand, now that energy companies are substantially down following a decline in oil prices, he has been a buyer of their shares. Many folks look for the best deal when seeking a new car or a loaf of bread, yet forget to do so when purchasing stocks.

9. Buy Like an Owner of the Business. A stock trader hopes to make a good decision about when to get into a stock, when to get out, then, at the right time, when to get back into it again, etc. He or she has little if any commitment to the company and its potential, instead just being interested in short-term gains. Yet lucrative timing is difficult, and the taxes plus commissions on equity gains can be significant even if we are successful. By multiplying the number of investment decisions, traders increase their chances of making mistakes. On the other hand, the example is given in "The Coffee Can Portfolio"** of someone who simplifies the investing process. He follows his wife's broker's advice to her and buys shares in companies the adviser has recommended. About a decade later, he dies suddenly. His wife inherits his estate, and she goes to the broker to have his portfolio added with hers under professional management. In those ten years he had averaged about $5000 in each asset purchased. However, he had made one change in the piggy-backed guidance coming from her broker: he ignored all the sell recommendations. The results were dramatic. His portfolio was a bit peculiar. There were several small holdings of less than $2000 each. A number of other holdings now each exceeded $100,000. Plus, there was one major portion of the portfolio, originally an investment in Haloid, that was now worth over $800,000. Its name had changed and was now called Xerox.

10. Invest Like a Visionary. Value investing, when first developed and taught by pioneer Benjamin Graham, was cutting edge and would come to revolutionize the field of buying and selling stocks. Similarly in more recent times companies like General Electric and now Berkshire Hathaway have been ground-breaking in the renewable energy industry. Trying out new styles need not be limited to the young. Old codgers can get in on profitable innovation as well!

Primary Sources:

*Investment Wisdom from Warren Buffett - 10 Lessons You Can Learn from the Legendary Financier. Dan Caplinger in; June, 2016.

**The Coffee Can Portfolio. Robert G. Kirby in Classics - An Investor's Anthology, pp. 706-714. Homewood, IL: Dow Jones-Irwin, 1989.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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