Warren Buffet - Posted by JPiper

Posted by Nate on March 13, 2001 at 22:28:25:

JP,

You’re right!! I always bet full odds, but for some reason (actually…I know the reason…it was early and I was half asleep) I neglected to mention that.

Anyway, good that everyone now knows basic craps strategy. Short of blackjack (if you know how to play…most people don’t), it’s one of the best bets in the casino…

Regards,
NT

Warren Buffet - Posted by JPiper

Posted by JPiper on March 13, 2001 at 01:16:13:

I noticed that Berkshire Hathaway has just published it?s annual report. For some classic reading by one of the world?s wealthiest investors, Warren Buffet, go to http://www.berkshirehathaway.com/. Select annual report, then ?chairman?s letter? to read some of the really priceless wisdom regarding his company?s operation, the economy, and stockmarket. Here?s an excerpt:

?Leaving aside tax factors, the formula we use for evaluating stocks and businesses is identical. Indeed, the formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by a very smart man in about 600 B.C. (though he wasn?t smart enough to know it was 600 B.C.).

The oracle was Aesop and his enduring, though somewhat incomplete, investment insight was “a bird in the hand is worth two in the bush.” To flesh out this principle, you must answer only three questions. How certain are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)? If you can answer these three questions, you will know the maximum value of the bush ¾ and the maximum number of the birds you now possess that should be offered for it. And, of course, don?t literally think birds. Think dollars.

Aesop?s investment axiom, thus expanded and converted into dollars, is immutable. It applies to outlays for farms, oil royalties, bonds, stocks, lottery tickets, and manufacturing plants. And neither the advent of the steam engine, the harnessing of electricity nor the creation of the automobile changed the formula one iota ¾ nor will the Internet. Just insert the correct numbers, and you can rank the attractiveness of all possible uses of capital throughout the universe.?

JPiper

Great stuff… - Posted by Ben (NJ)

Posted by Ben (NJ) on March 13, 2001 at 08:31:44:

the last few years we have had similar “dinner table debates”. My brother runs a small hedge fund which is
technology oriented. He had been criticizing my Dad for
his “old economy” mentality, particularly Dad’s large position in Philip Morris which was trading in the doldrums at about $18.00 per share at the time tech stocks were showing returns in the thousands of percent. Now brother is eating his words and Philip Morris is the best performer in the Dow, trading at about $ 50.00. (Ironically, I invested in both areas
and half my portfolio negated the other half.)

Re: Warren Buffet - Posted by Tim (Atlanta)

Posted by Tim (Atlanta) on March 13, 2001 at 07:17:30:

You know, it is funny. No matter how many times the supposed experts say that there is a “new economy”, they are still wrong. Business still operates on the same principles that it always has. The market became extraordinarily overvalued in 1999 and 2000, and now the correction is happening. Should we be surprised? I don’t think so.

It is sort of like a man, while standing at the top of a tall building, telling himself “This is a new world, gravity doesn’t apply anymore”. The so-called experts agree with him. He hears this so many times that he believes it. Then he jumps. Well, gravity still applies, and he is promptly applied to the sidewalk below. Same thing in business. No business can survive long term without profits. It just can’t happen. The basic laws of business still apply. Even if we choose to ignore them. So no, I don’t feel sorry for all of the people who are losing a fortune in the stock market. They all thought I was crazy when I got out last year.

Now tell me, who is crazy now???

That’s my .02

Tim

Re: Warren Buffet - Posted by Michael (tejas)

Posted by Michael (tejas) on March 13, 2001 at 06:58:04:

I had alot of advanced mathmatics in college, but for
the life of me I couldn’t make heads nor tails of
"the maximum value of the bush three fourths". Huh?

So I went to the source and voila, for some reason
netscape had used the numerical three fourths sign
instead of dashes, weird.

Buffet is a wise man, and the best buy and hold investor around. Buffet is one of the proponents
of the estate tax, and my favorite witticism of his
concerned inheritances for his children. He said he
would leave them enough money to do whatever they
wanted, but not enough so they didn’t have to do
anything.

Michael (tejas)

“A pin lies in wait for every bubble” - Posted by JohnG

Posted by JohnG on March 13, 2001 at 06:57:03:

Here is another one of his gems from the financial pages this morning:

"Reflecting on the late-'90s high-tech craze that left some investors
wondering if he had lost his touch, Buffett noted the irrationally huge
valuations the market placed on dot-coms and other businesses almost
certain to end up worthless.

“It was as if some virus, racing wildly among investment professionals as
well as amateurs, induced hallucinations,” he wrote.

“This surreal scene was accompanied by much loose talk about ‘value
creation’ . . . What actually occurs in these cases is wealth transfer, often
on a massive scale. By shamelessly merchandising birdless bushes,
promoters have in recent years moved billions of dollars from the
pockets of the public to their own purses.”

In the end, he observed, “a pin lies in wait for every bubble.”

Now for us the big question is : Does this mean that the overpriced high tech area is nearing bottom and that there are incredible buys out there ? Should we take some of our profits from our real estate and diversify into high tech stocks that are off as much as 80% ?
Or should we keep doing what we have been doing and continue to invest in real estate ?

Cover of WSJ today (14th) - Posted by SueC

Posted by SueC on March 13, 2001 at 13:13:58:

A good article about valuations in today’s WSJ (Tuesday) - says, “the bad news is, stocks STILL aren’t cheap”

Sue

Already got my pin - Posted by DavidV

Posted by DavidV on March 13, 2001 at 12:27:10:

After studying charts and all that stuff i’ve turned 40k into 25k, and it only took 6 months. Anyone need any stock advice let me know. :slight_smile:

Re: "A pin lies in wait - Posted by JPiper

Posted by JPiper on March 13, 2001 at 11:39:21:

I wouldn’t try to “fix” anything that isn’t “broken”. If your real estate is working for you, I’d keep doing it…and I know yours is.

But certainly I have moved Cisco and Oracle to my “watch” list. I think you’d be nuts not to have an interest in companies that have been beat up like this. On the other hand, my personal belief is there’s no rush here…to me the stocks still look expensive relative to their forthcoming earnings…and the market may still have unfinished negative business. So I’m watching rather than acting. Remember the old saying “don’t try to catch a falling knife”. And then too, it may take a while even after the tech stocks do find their bottom…to make any significant headway. We’ll see.

JPiper

Re: reinvestment - Posted by JD

Posted by JD on March 13, 2001 at 08:48:55:

IMHO Cisco, Yahoo, and the majority of other new economy companies are still overvalued despite their dramatic drops.

Re: "A pin lies … - Posted by Michael (tejas)

Posted by Michael (tejas) on March 13, 2001 at 07:39:46:

Buffet doesn’t invest in tech stocks because as he has
said, he doesn’t invest in things he doesn’t understand. So he certainly isn’t saying for you to.

Buffet does not call tops and bottoms, he acquires
good buys, period. He is saying simply this:

The tech sector had birdless bushes, or bushes with
far less birds than imagined, at the least.

A bird in the hand is worth two in the bush. Buffet
doesn’t buy new businesses with no or low earnings.
So he’d never buy the amazons or yahoos of the world.
He might buy an established business that had a
temporary setback in earnings.

A house bought at 20% below FMV is a bird in the hand,
there is no promise of future birds, the equity is
present.

When you read the words of the truly great traders
and investors, (Buffet, Soros, William O’Neil, Richard
Dennis and others) you will find that they counsel
against over diversification. It has been mathmatically
proven that once you own 16 stocks, you
have eliminated 93 percent of the nonmarket risk,
(think Firestone). You cannot diversify away the market
risk as a whole by buying several mutual funds owning
hundreds of stocks. You just doom yourself to mediocre
returns.

Beyond the 16 or so stocks, diversification should be
across asset classes with appropriate diversification
within each class, real estate being one of the asset
classes.

Until you have more money than real estate to buy,
I think it is wise to follow how most great fortunes
were made. Instead of “don’t put all your eggs in one
basket”, one should put all their eggs in one basket,
and watch that basket!

Michael (tejas)

Investing and gambling (long, rambling) - Posted by Nate

Posted by Nate on March 13, 2001 at 09:10:43:

I think there’s definitely something to be said for that.

I recall reading another book or article about Buffett a few years ago, and he made a statement to the effect that “diversification is simply a form of insurance against not knowing what you’re doing.”

This really rang true to me. The reason investment advisors tell “the masses” to diversify is that most of them DON’T know what they’re doing. If you don’t have the time or energy to put into researching companies to determine which stocks to buy and at what price, you probably ARE better off buying a mutual fund or simply investing in the DJIA or S&P or some other index. Or if you want to buy individual stocks, buy a lot of them so that if you make a mistake it won’t ruin you.

The flip side is that, for those of us who DO know what we’re doing, we SHOULD concentrate in those things because they will make us the most money in the long run. For example, I currently own some stocks, but I am seriously considering selling them and putting the money into real estate - something where I know what I’m doing (I think) - rather than hoping for a 10%-11% return annually (historical average) by leaving the money in a mutual fund.

Although investing and gambling are not exactly the same, there are some similarities. Another friend of mine always used to chide me at the racetrack for making too many different bets on one race. It was another example of me hedging against the fact that I didn’t know anything about picking winning horses (not to mention that there’s some random luck to it regardless of your skill at doing so). And you know what, I usually ended up losing more money than he did.

Or take craps, another example. The best best in craps is to play the pass line and LEAVE EVERYTHING ELSE ALONE. It is the players who throw side bets on several numbers at once that inevitably end up losing huge amounts of money. I once played craps in Kansas City for about 4 hours. I started with a $50 stake and ended up with about $200, playing the pass line. A guy next to me, who was making all sorts of side bets on every roll, had to go back to the ATM 4 times during that period, each time taking out at least $100 and sometimes $200. He ran out of money and left, broke, before I stopped playing.

Anyway, I know this was long and rather incoherent, but hopefully someone (besides me) will get a little wisdom out of it.

Nate

Re: Investing and gambling (long, rambling) - Posted by J.P. Vaughan

Posted by J.P. Vaughan on March 13, 2001 at 16:43:40:

Couldn’t resist, Nate…

The best bet in craps is taking ODDS on your passline
bet. Too bad you need to make the passline bet to take
the odds!

Good Post! - Posted by Eric C

Posted by Eric C on March 13, 2001 at 10:21:27:

Great post, Nate.

Diversification makes sense only if you truly have doubts about your abilities or those of your advisors.

Asset allocation is the term most in favor today. Different words meaning exactly the same thing; that is mediocre performance.

There are two groups that should be interested in diversification; those that understand too little about risk, and those who know nothing about it at all.

I believe it was Soros who once said, “it takes courage to be a pig”. Meaning that if you truly want fantastic rates of return, then you have to take some chances. And that is exactly what most people are unwilling to do.

Yours,

Eric C