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Tuesday, May 20, 2008

8 Quotes That Will Make You a Better Investor

"Not everything that can be counted counts, and not everything that counts can be counted."
-- Albert Einstein
When Warren Buffett scooped up gobs of Coca-Cola (NYSE: KO) stock in the late 1980s, much of his analysis was likely from something you wouldn't find in any financial statement: the effect Coke had on consumers' minds. On the flip side, if you took the run-up in homebuilders' earnings over the past few years as a normal state of affairs without considering how irrational buyers had become, you'd be eating crow today.
"If you hold a cat by the tail, you learn things you cannot learn any other way."
-- Mark Twain
And if you own a stock that tanks beyond recovery, you'll learn something that no collection of financial horror stories will teach you. Rather than kicking yourself when you make an occasional blunder, take it as an opportunity to learn an important lesson. Years of classroom study or outside reading can't teach you what the experience of actual investing will.
"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."
-- Mark Twain
Those who convinced themselves home prices were guaranteed to march higher for eternity played a painful joke on themselves. It wasn't a lack of information about an impending pullback, it was that they had convinced themselves a pullback would never happen. If you ever find yourself holding a stock that's "certain" to do well, it's time for a reality check. As Ben Franklin said, "Certainty? In this world nothing is certain but death and taxes."
"All men's miseries derive from not being able to sit in a quiet room alone."
-- Blaise Pascal
With so much information pumped throughout the Internet, you could find a dozen investment ideas promising triumph before daybreak. Odds are, many of them will turn out to be rubbish. Investing success comes to those patient enough to wait for the fat pitch, not those who anxiously jump willy-nilly into anything and everything thrown their way.
"Those that fail to learn from history are doomed to repeat it."
-- Winston Churchill
Surprise, surprise, real estate isn't the first absurd bubble we've seen. Just eight years ago dot-com darlings like Yahoo! (Nasdaq: YHOO) and Amazon (Nasdaq: AMZN) taught us an important lesson in bubble mania.
"I've made up my mind ... don't confuse me with the facts!"
-- Chris Axon
This one ties in perfectly with Churchill's quote above. Last year, few cared that stocks like Crocs (Nasdaq: CROX) and Chipotle (NYSE: CMG-B) traded at insane valuations. As long as shares kept soaring, nothing would change their minds. Until the stocks tanked ... then they learned quickly. It's essential to be open-minded about your investments -- even if you love 'em to death -- when the facts change.
"A jug fills drop by drop."
-- Buddha
While many chase runaway investments that will make them spectacularly rich in short order, it's telling that one of the best companies to own over the last several decades -- Berkshire Hathaway (NYSE: BRK-B) -- has compounded its book value per-share at 21.1% per year since 1965. That's an astonishing performance, of course, but it happened slowly enough to cause those looking for instant success to dig elsewhere. While quick multibaggers can be appealing, massive fortunes are more often awarded to those patient enough to let the magic compounding strut its stuff over time.
"This time, like all times, is a very good one, if we but know what to do with it."
-- Ralph Waldo Emerson
There's more than enough negativity right now to make you think the Four Horsemen are galloping toward Wall Street. Regardless of how nasty it gets, panicking will get you nowhere fast. By swimming against the current and digging through the carnage of stocks unfairly brutalized by the credit crunch, you can capitalize on investing situations that others were dumb enough to create.

Source & complete article:

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Thursday, May 15, 2008

Fooled by Percentages!!

Following is a good article about Mental anchors found in Sanjay Bakshi's blog.


One of my favorite experiments in class involves asking my students the following question:

“Suppose that you visit a furniture store in a mall to buy a lamp for your bedroom. You find a lamp you like and it has a list price of Rs. 5,000. Happy with this deal, when you approach the sales representative ready to buy the lamp you picked, she informs you that one of their stores which is just a ten-minute walk from there is closing down and you can buy the same lamp over there for Rs 1,000 less. Please raise your hand if the 20% discount is sufficient incentive for you to walk ten minutes to the other store to buy your lamp.”

About 70% of the students raise their hands.My next question is then addressed to only those who raised their hands.

I ask them:“Suppose that you visit a car showroom to buy a car and after checking out many models, you find one you like. It costs Rs. 500,000, you are told by the sales representative. However, she also informs you that one of their showrooms which was just a ten-minute walk from there is closing down and you can buy the same car over there for Rs. 499,000 or Rs. 1,000 less. How many of you would like to walk ten minutes to go over to the other showroom to save Rs. 1,000?”

I hardly see a hand raised. Somehow, students who were happy to walk ten minutes to save Rs 1,000 on a lamp are reluctant to walk ten minutes to save Rs. 1,000 on a car!What is going on here?Indeed, when I reframe both questions again, in a different form, students appeared puzzled:“Would you walk ten minutes to increase your net worth by Rs. 1,000?”Why would a man decline to save Rs 1,000 in one situation, and gladly accept it in another, with the same effort required in both situations?

Isn’t a penny saved a penny earned? To most people, apparently not, suggests research in behavioral economics. Part of the reason is a bias arising out of a phenomenon called the “contrast effect” which deals with how we treat multiple pieces of information presented to us one after the other.If you put something sweet in your mouth immediately after tasting a lemon, it will taste much sweeter than it really is. The contrast between sweet and sour gets accentuated if one experiences one taste immediately after the other. If you meet someone very attractive at a party, and immediately after that you are introduced to someone who, in contrast, is merely average looking, then the average person would appear to be more unattractive to you than would have been the case had you not met the very attractive person beforehand.Similarly, a saving of Rs. 1,000 looks much bigger than it really is when it is contrasted with a purchase price of Rs 5,000 for a lamp, (a 20 percent saving!) but looks much smaller than it really is when it is contrasted with a purchase price of Rs 500,000 for a car (only 0.2 percent saving).It does not matter to a man that a Rs 1,000 saving will have the same effect on his net worth whether he saves it on a lamp or a car. Somehow the presence of a 20 percent reduction triggers an irrational response in his brain. The brain, operating at the subconscious level, is often influenced by the presence of false “anchors”. Anchors are pieces of information to which a mind tends to latch on to while making a decision. And the human mind will often latch on to false anchors created by various influences like availability or contrast.In a classic experiment, researchers asked a group of people if the Mississippi River in the US is longer or shorter than 500 miles (the anchor). Most people responded that it was longer than 500 miles. They were then asked to estimate the length of that river. The average answer was about 1,000 miles.A second group, in contrast, was asked if the Mississippi River is longer or shorter than 5,000 miles and were then asked to estimate its length. Most people responded that it was shorter than 5,000 miles but the average length of the River in this group was about 2,000 miles!The actual length of the Mississippi River is 2,348 miles but false anchors of 500 miles or 5,000 miles tend to pull the average answers towards them!In the lamp vs. car experiment, students who chose to walk ten minutes to save Rs 1,000 while buying a lamp but who refused to walk ten minutes to save the same amount of money while buying a car, were suffering from “anchoring bias”. Their minds were latching on to the wrong anchor of a large percentage savings on a list price, instead of latching on to the right anchor of their personal net worth.Anchors are important, of course, but one has to be careful when deciding if an anchor is valid or not. A man who feels miserable because he dropped Rs. 500 from his pocket which had only Rs. 1,000 in it even though his personal net worth is Rs. fifty lacs is suffering from an anchoring bias. He incorrectly identifies the money in his pocket as a valid anchor as opposed to his net worth. He is also suffering from bias arising out of contrast effect because Rs 500 lost out of Rs 1,000 in his pocket looks very big to him in percentage terms.In contrast, a rational investor who practices wide diversification, knows that its inevitable that some of his picks will turn out to be duds. He does, not, however, let such outcomes make him miserable because he has trained himself to latch on to the right anchors such as the size of his portfolio, and not the percentage lost in a single position.A stock may have fallen 50 percent from its all-time peak in a market crash, may have gone below its 52-week low price, may have fallen below the price at which its shares were offered in a hot IPO, or may have fallen below par value. None of these things mean that the stock is cheap. A stock is cheap only if its price has fallen well below than what the company is rationally worth on a per-share basis.In contrast with underlying value which is the right anchor to latch on to, all time peak prices, 52-week low price, IPO price, and par value are all false anchors. If you blindly buy stocks merely because they have fallen well below some false anchors, thereby allowing contrast effect to make you feel that they are much cheaper than they really might be, then you are functionally equivalent to the man who is trying to catch a falling knife.And that, you will agree, can hurt.

Sanjay Bakshi is a Visiting Professor at Management Development Institute, Gurgaon.

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Wednesday, May 7, 2008

Berkshire Annual Shareholder Meeting Update

This post is an update on my visit to Omaha to attend Berkshire Hathaway Annual Shareholder meeting. Read more about Warren Buffet & Berkshire Hathaway. Click Here


I travelled to Kansas City as the flights to Omaha was very costly during this weekend. From there it was around 3 hrs drive to Omaha. Reached Omaha around 6:30 PM. Omaha is a small and sleepy city, but during this time of the year, they attract world investment community's attention with over 30,000 decent to town from all over the world. Went straight to the Borsheim Jewellery for the Friday's cocktail party. Party was in the tent in front of the Borsheim's. . fully packed with live music, food, drinks...

Borsheim's Jewellery was open for shareholders and it was also packed, shareholders getting a chance to look/buy from one of the best collection of Jewellery (Borsheim is the one of the largest Jewellery stores in US) at special discount rate.

I met many shareholders from all over the world. Many of the shareholders I met were holding their Berkshire share for as long as 20 years. Back at the tent there were long lines for food and drinks.. I joined the queue. Headed back to my hotel room at around 10PM.


It was informed that the gate to the "Quest Convention Center" (largest convention center in Omaha) will open by 7:00 AM. I reached there by 6:45AM, while walking towards the convention center, I could see the very long queues leading to the different doors. I was pretty sure of one thing, i will be lucky to actually get a seat in the convention center, let alone hopes of getting a good seat. At 7:00 AM they opened the doors and there were a mad rush with people running like crazy. By the time I was able to get it and the huge auditorium was getting filled quickly. I walked towards the front and all the seats where occupied. Saw an empty seat in front very next to the ones reserved for manager. I asked around what time others came in and looks like the line started forming around 2:00AM!!! I was very luck to get that seat which is very close to the podium.

Bill Gates, Susan Decker (Yahoo) were in front enclosed row along with other Directors.

At 8:30AM Berkshire movie started which starred Warren Buffet, Charlie Munger and few others. It was quite funny. Also, some compilation of behind the scenes from annual meeting and last years meeting. At around 10:00 AM the movie ended.

10:30 AM Buffet and Charlie came to the stage. Table were packed with their favourite foods - See's Candy & Coke. Buffet went straight to business. There were 14 Microphone stands all over the stadium and outside room from where people could ask questions. Buffet started taking questions from all the locations one after another. It was a pleasant surprise that he didn't take up any time and went straight to it. People asked all kinds of questions, it was not limited to any one topic: Investments, Berkshire, Politics, Environment, Oil, Dollar, Education, Ethics, Business.. anything.. And pattern was Buffet will give a long and clear answer to it and ask Charlie who was sitting next to him if he wants to add anything. By seeing Charie, i expected a quite person who doesn't seems to be funny. I was wrong. After the long answer from Buffet, Charlie would add 1-2 line quotes and it was both funny and truth to the core. I can say that Charie received more applaud.

Last year there were protest from the Klamath River tribes outside of the Convention center. This year there were questions related to Klamath River issue. Buffet asked Mid American CEO David Sokol who answered those questions. I think this was the most important 'issue' in the meeting. After 3 questions, Buffet said this issue have already got more number of questions than normally allowed (1 question per issue/person is normal). Protesters displayed banners for few minutes during the meeting.

First session was from 10:30AM to 12:00AM then a break for lunch. Started again at 12:30PM and Q & A ended at 3:00PM. And 3:15PM to 3:30PM was the Formal Business Meeting where the Board of Directors were elected. It was over in few minutes.

Except the Klamath River questions, the mood was light. I could see that Buffet, Munger and the crowd were enjoying every moment of it. I know I enjoyed it !!

Next was Nebraska Furniture Mart Baja Bash at 5:30PM, it is a huge store covering over 72 acres. Buffet brought the store from Ms. B.


Shopping at Borsheirms started at around 9:00 AM, but I reached there around 12:00PM, Borsheirms was packed and had food at the Berkshire tent outside. Met couple of other shareholders, one person I spoke to brought his shares 20 years back and is still holding it. He brought it at around $3000, (current price is around $135,000) and he was very happy with the company and Buffet. I have added a picute with him in the album.

At around 2:PM I headed back to Kansas City from where I had to catch my flight back home.... wow!! what a weekend!!

I bought two books at 15% discount for shareholder.

1. The Essays of Warren Buffett : Lessons for Corporate America by Lawrence A. Cunningham which is the one book Buffet recommends.

2. Warren Buffett Speaks: Wit and Wisdom from the World's Greatest Investor by Janet Lowe. I read it, sections are arranged based on themes and it contains many of his quotes. Most of the it I had already read it from different articles and books. Good for casual reading.

Annual Meeting Photos: Click Here

CNBC Live Blog (minute by minute update with Q & A):

Morning Session:

Afternoon Session:

Q & A:

Click here to read the complete article....