Wednesday, September 07, 2005

Mr. Market

The trip to Bandon was a success. My game held up and I even managed to post a few good scores.

I recently finished reading a fantastic book titled “Buffett: The Making of An American Capitalist” by Roger Lowenstein, a WSJ reporter. He did an excellent job chronicling Buffett’s early days and his path to success.

This book is a great read for anyone who wants to learn more about Buffett’s way of thinking and his philosophy about investing. You will also learn about the annual gathering of the Graham Group (founded by Buffett) which has grown in size throughout the years and includes renowned value investors such as Bill Ruane as well as Buffett’s good friend Bill Gates. What is important to note is that Buffett has modified Graham’s highly quantitative approach and introduced a more subjective and qualitative outlook on potential investments, a la Philip Fisher. This is manifested in his decision to buy shares of mega-franchises such as Coca-Cola and American Express. The shares may not have been “cheap” according to Graham’s view of the world, but Buffett’s genius was to understand the future earning power of these companies, to redefine “value” and to buy the shares at a “fair price”.

Buffett’s philosophy is summarized by Lowenstein and I have paraphrased them below. Print this and pin it on the wall next to your computer. It’s simple but powerful. The trick is to control your emotions when you invest. Do your research, make a decision and commit big time. As Ben Graham would say, do not let Mr. Market’s ups and downs trick you into questioning yourself.

  1. Don’t worry about economic forecasts and analyst price targets. Assess the value of the company from a long-term perspective and become part owner of the business by buying shares at a fair price.
  2. Invest in companies in which managers behave as owners and treat investors’ capital with care and responsibility (think return on equity).
  3. Buy stocks in companies and industries which you understand well.
  4. Do your own research.
  5. When you have identified an opportunity, buy the stock and buy a ton of it!

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