Warren Buffett and His Proven Strategies for Investing - Assignment Example

?Warren Buffett and his proven strategies for Investing “Be greedy when others are fearful and fearful when others are greedy.” Warren Buffett commonly referred as the “Saga of Omaha” is the world’s most successful investor. He was born on August 30, 1930. He is the CEO, chairman and the primary shareholder of Berkshire Hathaway. He has been regularly ranked amongst the world’s richest people. In 2008, he was given the tag of the world’s richest man. In 2011, he ranked third as the world’s richest man. A noted philanthropist, he is contributed much of his money for notable causes via the Gates foundation. Born to a stockbroker turned congressman, he was the second of the three children. From a very young age, he displayed a keen interest in business and money. With his unique ability to calculate numbers at the top of his head, he impressed many. Just when he was six years old, he bought 6 packs of Coca Cola from his grand father’s grocery store and sold it for a nickel out of which he made five per cent profit. Although his age of friends played games such as jacks and hopscotch, Warren on the other hand was making money. When he was 11 years old, he put his foot in the world of finance. When he was 11 years old, he bought 3 shares of Cities Service preferred. It costed him and his sister $38 per share. Sometime later, the stock fell flat at a rate of $27 per share. Warren became extremely afraid but he tired to remain calm till the stock rebounded to $40. He rapidly sold it, a mistake that he regretted when the Cities Service shot up to $200. This one was one of the most enlightening experiences of his life and he realized one of the key elements of investing- patience is virtue (Kennon) At the age of 17, he graduated from high school although he had no such plans of going to college since he had already made lots of money by going and selling newspapers. Despite all that, his father had other plans for him. He wanted him to attend the Wharton Business School situated at the University of Pennsylvania. In order to please his father, he stayed for some teachers claiming that he knew more than his teachers did. In 1948, when Howard was defeated in the Congressional race, Warren came back home and got himself enrolled in the University of Nebraska Lincoln. Apparently, with his dedication and working full time, he graduated in just three years time. Even when it came to graduate studies, he expressed similar resistance initially. After much conviction, he applied to the Harvard Business School which was rejected on the basis that he was too young and came out to be the worst admission decision in history. After that, Warren applied to Columbia where he had an encounter with the very eminent investors, Ben Graham and David Dodd. While in Columbia University, he studied under the guidance of the very legendary Ben Graham who became an inspiration to Warren Buffet due to his intelligent investment strategies. This person had a major impact on Warren Buffet’s life. Ben Graham searched for stocks that were dirt cheap and completely free of risks. He also tried to acquire a job at Graham’s company but failed in the beginning. After much ado, he finally got the job and till today, he lavishly praises him for all that he has learnt about stock investment. Graham wrote a book, “The intelligent investor” which Warren also describes as the greatest book written on investment. He also published another book “Security Analysis in which he talked about Intrinsic business value which was completely independent of the stock price. After some time, Graham retired and Warren started his own work whose capital was mainly provided by family and friends. The partnership proved to be very successful and Graham averaged an annual rate return of 23% which was by far leading the market rate (Kennon). Warren Buffet is also celebrated in history for being the most successful investor. He has been referred to as the, "The Oracle of Omaha" for his amazing investment techniques. In September 2007, he ranked on the third position for most amount of wealth. He is currently the chairman of the Berkshire Hathaway which he transformed from a textile company into a leading corporation. On May 29, 1990 Warren was declared a billionaire when his company started selling A class shares. Warren Buffett's Performance: Average Annual Return of Berkshire Hathaway Book Value 5 Yrs 10 Yrs Since Inception 7.3% 10.2% 19.5% Warren Buffett's Sector Weightings: Sectors Sector Weightings (%) Consumer Goods  33.8% Financials  31.4% Technology  18.2% Consumer Services  7.3% Health Care  3.5% Oil & Gas  3.2% Industrials  2.5% STOCK PORTFOLIO Sym Company Price Chg % Market Cap Book Value per Share ProRating AXP American Express Company 57.86 -0.05% 67.20B 16.18 Go Pro COP ConocoPhillips 76.01 +0.28% 100.92B 49.51 Go Pro COST Costco Wholesale Corporation 90.80 +1.07% 39.49B 29.47 Go Pro CVS CVS Caremark Corporation 44.80 +1.15% 58.31B 29.23 Go Pro DVA Davita 90.17 +1.00% 8.431B 24.26 Go Pro DTV DIRECTV 49.34 -0.30% 34.81B -4.404 Go Pro DG Dollar General Corporation 46.20 -0.15% 15.78B 13.33 Go Pro GCI Gannett 15.33 +1.25% 3.653B 10.54 Go Pro GD General Dynamics Corporation 73.38 +1.00% 26.13B 37.16 Go Pro GE General Electric Company 20.07 +0.60% 211.89B 11.19 Go Pro GSK GlaxoSmithKline 44.91 -0.11% 114.47B 5.205 Go Pro IR Ingersoll-Rand 41.35 +0.44% 12.91B 22.46 Go Pro INTC Intel Corporation 28.12 -0.16% 143.16B 9.016 Go Pro IBM International Business Machine... 208.65 +0.18% 245.92B 17.17 Go Pro JNJ Johnson & Johnson 65.96 +0.64% 180.13B 20.90 Go Pro KFT Kraft Foods 38.01 +0.53% 67.15B 20.00 Go Pro LMCA Liberty Media Corporation 88.15 +1.45% 6.965B 66.46 Go Pro MTB M&T Bank Corporation 86.88 +0.36% 10.91B 66.92 Go Pro MA MasterCard 420.54 -1.79% 53.37B 46.30 Go Pro MCO Moody's Corporation 42.10 +1.40% 9.346B -0.7135 Go Pro PG Procter & Gamble 67.21 +0.30% 184.92B 23.15 Go Pro SNY Sanofi 38.75 +0.94% 101.60B 29.96 Go Pro BK The Bank of New York Mellon Co... 24.13 +1.51% 29.26B 28.11 Go Pro KO The Coca-Cola Company 74.01 +0.27% 168.09B 14.05 Go Pro TMK Torchmark Corporation 49.85 +0.42% 5.082B 41.48 Go Pro UPS United Parcel Service 80.72 +1.09% 77.89B 7.366 Go Pro USB US Bancorp 31.68 +0.41% 60.46B 16.96 Go Pro USG USG Corporation 17.20 -3.15% 1.811B 1.481 Go Pro VRSK Verisk Analytics 46.97 +0.06% 7.681B -0.6022 Go Pro V Visa 118.00 -0.84% 95.93B 33.58 Go Pro WMT Wal-Mart Stores 61.20 +0.62% 209.59B 22.12 Go Pro WPO Washington Post 373.57 +1.04% 2.884B 337.03 Go Pro WFC Wells Fargo 34.14 +0.59% 180.04B 24.70 Go Pro As far as the investments of Warren Buffet are concerned, he does not reveal them explicitly. In fact, he and his company issue an annual report on the extensive holdings of his company in other businesses and corporations which is the only little clue of how, when, where and why he invests. However, he is prepared to sketch out the principles of an intelligent investment. Stock investments should be seen in a manner pertaining to how businesses are looked. The Benjamin Graham approach says that the stock investor should apply the same principles to buying a tiny share that he would do when buying a business. Other than that, the company should be well organized and possess good management techniques i.e. share buybacks, good use of retained earnings and sticking to what you know. There is also likelihood for earning capacity which includes company growth, dealing with inflation, capital expenditure, look through earnings and brand names. High returns should also be looked upon i.e. returns on equity and returns on capital. Moreover, companies should have a very practical approach towards debt. In order to be successful, the investor should be able to comprehend the company and the businesses should be uncomplicated. If all of the above things are met, the investment should be made at an affordable price keeping all the precautionary measure in mind. It is essential to consider the price/earnings ratios, earnings and dividend yields, book value and comparative rates of return. Investors need to take a long term approach (Buffet secrets). Warren Buffet investment advice is a bit hard to follow because his way of reacting to situations is different from that of the others. He believes in himself and doesn’t get alarmed like most of the other people do. No wonder, most of the people cannot invest like Warren Buffet because in order to do so, one needs to have the money, brains and the knack to overcome fear. Most of the people are not willing to invest their money into a machine which if doesn’t work their way can cost their life savings. That is what makes Warren Buffet different from others because he not only does the talking but also the walking and manages to outshine himself while the rest are still immersed in their fear (Portocarrero, 2010) As a matter of fact, small time investors are unable to execute Buffet investment strategies because they do not have the access to the quality of information that Buffet has. Besides, Buffet has also learnt investing through trial and error. Moreover, Buffet has been fortunate since the very beginning since his father was also a stock broker. Furthermore, he has been interacting with big names such as the CEO’S and the chairman so he was at a greater avanatge. His career spans from the age of 11 years. Common men learn important lessons of their lives from the mistakes they make. They fail because in Buffet books, they learn that they should invest with a ten year aim or ever longer. For example, if their stocks go up, they’re gleaming but if there stocks go down, they are sad. They lack the long term belief that Buffet possess due to his excessive market knowledge and experience. Holding themselves to the inferior stocks, they think that they are following Buffet’s strategy but in the end, they aren’t left with much because they’ve already paid too much for the inferior stocks. Investors after reading “How to become a millionaire like Warren Buffet” get greedy and rush out to buy stocks which results in the paying more. Also it does not have the long term benefits as Warren’s investment does. Buffet says that if you want to be there in the market, then you should be able to watch your portfolio at least lose 50% of its value without having to get worried. This cannot be applied to the masses since majority of the money are hard earned. The sad reality is that when people read Warren’s books, they are convinced that if their stock drops, they will be mentally prepared to handle the loss, however, that’s not the case. It’s only when something like that actually happens to them is when they realize and end up selling their stock at a big loss. Small investors cannot compare themselves to Warren since his knowledge about investment is far more superior. While addressing the public, he talks very humbly and modestly but at the same time, he is a very shrew person with the innate capability to remember facts and numbers that assist him in his investment. With his quick understanding of the market and the kind of tactics he plays, he has managed to keep his wealth rolling (Hamilton, 2012). The problem is that Warren Buffet’s investment strategies works brilliantly for himself. Small time investors should not try to mimic his ways as it can result in huge losses for them and cost them their life savings. Many of the people blindly follow Buffet’s techniques and have suffered a lot. Warren Buffet’s investment techniques can only be suitable for those people who share the same temperament as him. On the other hand, new investors should use less challenging ways. Also before attempting to invest, the investors should weigh the pros and cons of it since it could lead to serious consequences for them. References About.com, Kennon Joshua Warren Buffett Biography, http://beginnersinvest.about.com/cs/warrenbuffett/a/aawarrenbio.htm Exploring Warren Buffet secrets, http://www.buffettsecrets.com/index.htm Y charts, Warren Buffett Portfolio, March 31, 2012, http://ycharts.com/topics/warren_buffett_portfolio Wise bread,  Portocarrero Carlos, 18 March 2010, Warren Buffett's Investment Advice: Why It's So Hard to Follow, http://www.wisebread.com/warren-buffetts-investment-advice-why-its-so-hard-to-follow Investingator, Hamilton Rich, 2012, The trouble with Warren’s investment strategy, http://www.investingator.org/the-trouble-with-warren-buffetts-investment-strategy/ Forbes, Warren Buffet, March 2012, http://www.forbes.com/profile/warren-buffett/ Read More