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Friday , February 28, 2014

Basics of investing from Warren Buffett (also see in Jpeg)

Publication: Mint , Agency:Bureau, Edition:Mumbai/Ahmedabad/Pune/Bangalore/Chennai/Hyderabad/Kolkata , Page No: 16, Location: TopCenter , Size(sq.cms): 720

Basics of investing from Warren Buffett The veteran investor's advice to his company's shareholders remains the same ageold formulabuy and hold for the long term

WHAT I LEARNED FROM WARREN BUFFETT

BY RAJESH KUMAR rajesh.k@livemint.com

he annual letter to the shareholders by Warren Buffett, one of the most

successful investors of all time, is an eagerly awaited event in the world of investing. Every word from the "Sage of Omaha" is followed by investors across the world. This time was no different. An excerpt of his annual letter was published by t h e Fortune magazine on its website on 24 February and is being discussed all over the world. Warren Buffett, according to

the Forbes, had a net worth of $58.5 billion as on September 2013. Buffett is chairman and chief executive officer of Berkshire Hathaway Inc. The company and its subsidiaries are in diverse businesses including insurance and reinsurance, finance and manufacturing. The published excerpt is ba

sically an essay on fundamentals of investing, which can be followed by all investors to maximize gains in the long term. The basic essence of the essay is that it does not require a great deal of expertise to be a successful investor. However, it does require a

great amount of patience and the abi l i ty to r ide through business cycles. Buffett this time illustrated examples of his two real estate deals to drive home the point that one needs to identify a good investment idea and then hold on to it for the long term to reap gains. Here are five key takeaways

from his essay that investors can use while putting in their money.

Keep it simple In order to get reasonably

good returns, you don't need to be an expert in the asset class that you are investing in. In order to explain this, Buffett uses the example of a farm that he bought in 1986. He had very little idea about farm operations. But with the help from

This son, he did a quick calculation on how much the farm will yield and what will be the operat ing cost . Around 28 years down the line, the output of the farm has gone up three times and its value has gone up five times. The basic argument i s t ha t you need t o "keep things simple and don't swing for the fences".

Focus on productivity Buffett argues that you need

to understand the future earning potential of the asset that you are buying. If you are not able to do that, just move on. The idea here is that you must understand the business or the asset that you are buying. Buffet and his partner, Char

lie Munger, evaluate businesses in the same way irrespective of whether they are buying a small stake in the business or the entire company.

Avoid predicting price changes Thinking about price chang

es is speculation. Also, Buffett argues that something that has appreciated in the recent past should not be your reason for buying. People tend to buy when prices have run up quite a bit and sell when it has already fallen. Investors, in fact, should be doing exactly the opposite.

"A climate of fear is your friend when investing; a euphoric world is your enemy," Buffett wrote.

Avoid constantly tracking stock prices Buffett's style of investing is

that once you have bought an asset, you should not be worried about its price every day. This is what normally happens in real es tate investments . People don't go out to buy and sell every day. However in the stock market,

since prices are available on a realt i m e b a s i s , t h e r e i s temptation among investors ito do something which should be avoided. Says Buffet: "If you can enjcsy

Longterm approach is the on!y right way of investing. Parag Parikh 'chief executive officer, PPFAS AMC

Buy and hold works. You need to find an outstanding company and hold it for the long term. Raamdeo Agrawal joint managing director, Motilal Oswal Financial Services

The company must earn a healthy return on capital and should be able to generate free cash flow. —Vetri Subramaniam, chief investment officer, Religare Invesco AMC

Ltd, "It is the reiteration of what he has said before, which i s b as ica l ly buy and ho ld works." Experts argue that investors

should buy good companies and hold it for the long term. In case you find it difficult to identify stocks, you can simply invest through an index fund which is also cost effective in terms of management fee. T h e i d e a i s t o o w n

businesses which will do well and create wealth over time.

Saturdays and Sundays without looking at stock prices, give it a try on weekdays."

Don't waste time on macroeconomic and market predictions Listening to market predic

t ions and macroeconomic opinions, according to Buffett, is of no use in investing. The message is that once you have bough t a good a s se t , you should hold it for the long term.

There will be economic and business cycles in between but a good asset, bought at a reasonable valuation, will give you good returns in the long run. Buffett further says that if

you are a nonprofessional and cannot pick stocks, you still have an option of investing in s t o ck s . A l l you need i s a diversified portfolio of good bus inesses which you can eas i ly own th rough index funds. "The goal of the nonprofes

sional should not be to pick winners—neither he nor his "he lpers" can do tha t—but shou ld ra ther be to own a crosssect ion of businesses that in aggregate are bound to do well," he argues. Most of the things that Buf

fett talked about in his essay are not new for people who follow the principles of value investi n g . S a y s R a amd e o Ag r awa l , j o i n t manag ing d i r e c t o r , Mo t il a l O sw a l Financial Services