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Buffett FAQ

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143 pointstim_sw40 comments

This is a great complement to a book I loved: “The Essays of Warren Buffett,” a compilation of Warren Buffett's shareholder letters, organized by subject matter.

http://www.amazon.com/Essays-Warren-Buffett-Lessons-Corporat...

Thanks a lot for sharing. I am an utter novice at investing. Until now I have looked more at technicals(and gambled) when it came to stocks. Needless to say the current market scenario has left me burnt.

I am trying to do fundamental analysis a lot more.(currently trying to get my head around Benjamin Graham's "Intelligent Investor" - with inputs from Buffet himself)

But this mode of investing needs a lot more mental strength than i thought - it is almost a strict regime that needs to be followed.

Wanted to know how regular Stock Investors in the HN community go about doing this. I.e. Studying the macro/micro factors and company fundamentals on a regular basis - and making investment decisions accordingly.

Any books or tips would be more than welcome.

Bogleheads wiki: https://www.bogleheads.org/wiki/Main_Page

The book containing similar content: http://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Lari...

Don't forget the forum: https://www.bogleheads.org/forum/index.php

Is stock investing your filltime job, or a side hobby?

As a side hobby, does it pay more than doing your main field of work (say programming?)

As someone who has spent a few years working a dayjob in finance (but is currently far far away), here is how I play the stock market.

1) Work a day job

2) Use some of profits from 1 to invest in low cost index funds

3) Do not touch any investment no matter what the talking heads may try to convince you to do.

Will I get Warren Buffet level returns? Nope. But my money will grow steadily without my intervention.

Sure you can outsmart the market. But there are a lot of really smart traders and programmers and robots working against you. Why would I expect to beat them in something I only give a few hours a week to?

I agree a lot with what you're saying, but ...

> Sure you can outsmart the market. But there are a lot of really smart traders and programmers and robots working against you. Why would I expect to beat them in something I only give a few hours a week to?

The goal isn't to beat swing traders, options guys, hedge funds and other people. The goal many people have is to just do better than a Vanguard fund (or whatever index you like).

But you're right, if someone doing this for 40 hours a week only beats an index fund 50% of the time, how will you do better doing it an hour a week?

(Full disclosure: sometimes, I do try to beat the indexes. I view it more like tax-deductible gambling.)

True, but how much better than the index do you have to do - and at what risk?

If you have 500k to invest, and your goal is to do 1% better than the index funds.. this is easy to compute. You want to make 5k "extra" with your stock market playing. If you consult for $100 an hour, then you need to be able to do this 1% win in <= 50 hours a year (about 1 hour a week).

So you could do this for a year, measure, and see "Yes, I spent 50 hours and I made 5k extra over the S&P 500, so my time paid for itself".

However- did you account for increased risk? Very very likely you got the extra gains by extra risk (say, invest in 10 stocks you think are hot instead of the 500 of an index fund). So some years you will win, some years you will lose. How do you even calculate how more much risk your pick has over an index fund? Wall Street has a way to calculate this risk, I am not sure the average day trader does. How good is a strategy where 80% of the time you gain 1% over an index, but 20% of the time you lose 50% more than the index? (It looks really good while it works, until it doesn't!)

Ultimately, many people who trade for fun are gambling - not much different from picking horse races or football game results.

This is a very good perspective and something that hits home with me. I'm constantly struggling to do "more" beyond my areas of expertise thinking that it's going to be cheaper/make-more-money, etc.. I feel like the advice you just gave applies to many areas, not specific to the stock market or investments.

For sure. And I think there is a whole crowd of "Outsource everything" people that would say to calculate the return of your time, and outsource anything that doesn't meet that.

The place where this can fall apart, is that sometimes those other things have value in the doing of them. An example for me is mowing my yard. I think my total return is something like $30 / hr to mow my yard. However I get outside, I get exercise (push mower), and I get to make sure my yard is done exactly like I want it. So even though an accountant might say I should hire someone to mow my yard, I don't plan on it (Maybe if my freetime got so low I didn't have the time to do it anymore)..

You should outsource things based on value, not price.

Tell me more.

If I have time to do 1 thing and outsource 1 thing.. how do I pick between changing my oil and trimming my hedges?

Your definition of how you 'play the stock market' seems to lack any aspect of 'play'.

This is rather intentional ;)

I love to play videogames. I don't play with my retirement or money that I need to live. I have always found hard work more satisfying than gambling.

Why not just say 'I don't play the stock market' though? It's fine to not gamble on stocks, but to suggest you 'play the stock market' when you don't seems disingenuous, and undermines any message you have about it being unnecessarily risky.

Some people use "play the market" to mean, "I make investment decisions, and purchase stocks". That's the conventional meaning.

In this case, though, he's contrasting the "play" as in "fun" aspect. He doesn't do it for fun, and instead treats it as work: minimizing risk, etc.

If I were "playing" this, I could do it with Fake Money and compare strategies over time, or invest pretend money to do all the same work. I don't think I'd be able to do it if gambling with real money.

As someone who has never played the stock market (or invested in any securities), what services do you use? Do you need to use multiple services in order to trade the different possible securities and markets?

According to an analyst friend, some of the online sites geared towards small-fry individuals are a bit shady, in the sense that they bet against their own users; I believe Etrade was in that category.

Any recommendations for a "beginner's tutorial" on how to get started?

Read more Warren Buffet, less Jim Cramer. Definitely do not read stuff where some random guy wrote it (a lot of the investing news sites.)

I'm not convinced someone who doesn't know much about business can be a good investor.

Consider the worst thing that can happen isn't losing everything you invested but rather making a huge return completely randomly. People who have a bunch of money made in an unrepeatable way are miserable and often die quickly.

I personally use Schwab, because (at the time I opened the account) opening an investing account also let you open a checking account with refunded ATM withdrawals. The brokerage account also has access to extended hours trading, though I don't know if that's a standard feature.

I also have a Capital One Investing account (partially because I rolled a 401k into an IRA there), and I can say that Capital One has cheaper transaction fees. But I'm an index fund investor, so I don't really care about the fees as much.

That's the extent of my experience with investing. It's not a lot, but I hope it helps.

I always wondered, couldn't you just buy a berkshire stock and chill? I mean I get that it's pretty easy in hindsight to identify that berkshire was a success and that this isn't easy to call (and that various other funds were promising at some point until they weren't), but after so many years of good returns it looks like a safe bet. Since the 60s its total returns turned out orders of magnitude above the S&Ps. (although you could say this is mostly due to the 80s, berkshire vs S&P returns have been much closer the past decade, but berkshire still did better consistently)

Another question I have is, do people expect the price to drop when Buffet ends his work at berkshire for whatever reason? (whether by choice or circumstance)

Yes, it is certainly possible to buy Berkshire and chill.

Past performance may not tell you anything about the future; if you're going to buy any company, even Berkshire, do it because you like the business and the price, not because you like the record.

In general, it's expected that Berkshire's rate of growth will approach that of the market simply because it's so big.

A correct prediction of any Berkshire price movement is worth billions of dollars. I don't know what's going to happen when Buffett turns over the reins. You can make arguments for price movement in either direction. I'm certain that the trading volume in the days following the news will be significant.

And just holding 1 stock increases your risk a lot. You may get better returns then the S&P 500. But you WILL have higher risk.

Odds of the entire S&P 500 losing 75% of it's value is pretty low, much lower than berkshire losing 75% of it's value (feel free to replace 75% with any number and the argument stands)

While intellectually, I know this. My latest buy of S&P 500 ETFs are 7% underwater at the moment which is annoying me. Though that's an unrealized loss and will rebound at some point in the not so distant future.

So the trick for these kind of stations ("Feels bad emotionally even though intellectually I know it is false"), is to come up with an intellectual solution to it.

For example: Set up your retirement account to auto add X dollars per month, then have your SO change the password to the online account and not tell you the password. You can still get a yearly summary of what is going on, but there will be no emotions felt at the market losing 7% if you can't even see the balance.

Yes. Part of the scientific explanation of Buffets return is explained in Pedersens "betting against beta" paper. Here, it is shown that investing with cheap leverage in boring stocks (like Buffet) is better than investing in risky stocks without leverage, even when the leverage is chosen such that both strategies are equally volatile.

By default, I dump money into low-cost index funds with dividends reinvested. Usually into well-established, suitably diverse indices. S&P 500, FTSE 250 (but not the FTSE 100 - not nearly diverse enough for my liking) and so on. I've got about three times my annual income currently invested; it's about 75% indices, and 25% individual companies, and two lumps of gold that I've lost somewhere in my house.

I don't specifically go researching much in the way of individual stock picks. I don't set my criteria and then go looking for companies that meet that criteria; I keep an eye on the news and trends and so forth, and build confidence that a sector (or sometimes a specific company, but that's rare) will do well.

Some examples; when the UK government made it clear that they will do anything to prop up the UK housebuilding companies (which to my mind was when they started underwriting people's mortgages with the "help to buy" scheme) I piled into UK housebuilders, and they've done very well.

When I found myself noticing that the dollar seemed awfully cheap a year or so ago, I looked for reasons why (and where it might go next) and I altered my balance of index funds to buy into the US some more (which worked out pretty well).

When Nokia started getting grudging good reviews for their phones, I looked into what else they were up to and bought into Nokia right before Microsoft bought their handset business.

It hasn't all been good; I bought into ARM and IMG, hoping to ride the spread of mobile phones, and while ARM came in like a Viking, I made a loss on IMG (although the gains on ARM far outweighed the loss on IMG). A couple of UK retailers have been very disappointing (although still better than just cash in a bank).

I rarely sell. I bought into BP some time after their big spill, anticipating that the run of bad news would slow and they'd start to recover. As it was, the run of bad news went on and on and on and it looked like they'd be dealing with it for years. Sold up, put it into a US railroad company (which came on like a viking - another pick based on the idea that as the economy recovered, there would be a renewed global interest in new railroad technology; I picked the sector first, and then went looking for good companies in that sector).

> that a sector (or sometimes a specific company, but that's rare) will do well.

There are sectors that have grown massively - such as air travel - where no individual company has done very well for long.

By "do well" I don't mean grow. As you point out, the air travel industry can grow and grow without actually doing well. Seats on planes are a commodity item, the barrier to entry into the airline business is simply cash, and there's always someone ready to cut their prices right to the bone (and beyond) and in doing so shred any profit you might have hoped to pull in.

sure, often growth is a good sign, but I'm looking for a sector that will jack up the profits. If that's through growth, great. UK house builders, for example, have a reputation of not growing as fast as they could because they want to hold up the ridiculous prices. Many (not all, of course) companies are actually quite bad at growing, especially if their core business is mature and saturated; I avoid companies that always take their profits and, instead of giving them to me, blow them on ill-considered attempts to expand beyond their ability.

Sure, I miss some (and some of the ever-expanding behemoths are a perpetual mystery to me; I avoid companies whose ever-increasing stock prices are based on the hope of a shiny far-future), but on the whole it's working out. As far as I'm concerned, the default place for profits is in my pocket (and then in other companies). On average, it seems that I can invest it better in other companies than the company can reinvest it in itself.

Funny, I bought BP after the oil spill and did quite well on it. I have found that bad news can hurt deeper and longer than anyone thinks, in that case I got it right. I tend to approach it as if I'm going to hold for ten years at least, but then I buy after bad news when I think a stock is unlikely to be overpriced. The UK home builder, Barratts, also worked out for me, I bought some when the head of the company was on radio explaining how they provided their own finance to buyers while the banks weren't lending and how they did it before during previous building recessions.

Here are some books Buffett has recommended, I'm sure there are tons of other books, these are just the ones that have stuck with me.

Investing: 1) The Intelligent Investor - Benjamin Graham 2) Security Analysis - Benjamin Graham 3) Common Stocks and Uncommon Profits - Philip Fisher 4) The Little Book of Common Sense Investing - John Bogle 5) The Most Important Thing - Howard Marks

Economics: 1) An Inquiry into the Nature and Causes of the Wealth of Nations - Adam Smith 2) Where Are the Customers' Yachts: or A Good Hard Look at Wall Street - Fred Schwed 3) stuff by John Maynard Keynes (never heard him mention exact title)

Others: 1) Poor Charlie's Almanac - Charles Munger 2) Business Adventures - John Brooks 3) How to win friends and influence people - Dale Carnegie

Then there are some things I've never heard him explicitly recommend but I think are definitely worth reading: 1) Letter to shareholders (all of them, you can find the ones of his partnership and earlier ones online) 2) The Snowball - Alice Schroeder 3) Tap Dancing to Work - Carol Loomis (There are tons of books on Buffett, but these two are friends of his)

Also, if you ever go to his shareholders meeting, there's a whole list of "Buffett approved books". Some that I can remember from this years meeting (other then the ones mentioned above): 1) all of them found on https://www.poorcharliesalmanack.com/ 2) Dream Big - Cristiane Correa 3) a bunch more that I cant remember

Finally on his investing, he has laid out a bunch of times what he believes is best for ordinary people who aren't going to devote most of their time to investing namely, buy a low cost index fund (he recommends Vanguards, I believe it was this one https://personal.vanguard.com/us/funds/snapshot?FundId=0540&... ) I'm not quite sure why so little people (that I know) listen to him. It seems that people want to show that they can outperform the market, but rarely do.

I am by no means an expert but here are my thoughts based on my experiences in the field.

(a) In my opinion, Technical analysis is just B/S and keeps people busy thinking that they can draw lines all over the chart and predict the market movements by looking at moving averages or formations such as 'head and shoulders'.

(b) Fundamental analysis works long term but the market is irrational. Also the analysis doesn't include black swans (Nassim Taleb)

I am interested in super cheap ETFs or ETNs that people start to ignore or short to the point of death. Ex. UWTI. I am assuming that at some point, the short positions need to be filled again and when general public starts to ignore them, that is when the big players move in and collect it all for cheap.

Since no one has really answered your question, I will chime in.

Firstly, investing is a very personal thing. The style of investing you follow will depend very much on your temperament, investment timeframe, investable cash flow, time you are willing to commit, etc. Basically, you need an investment philosophy. I don't know any shortcuts for this besides reading a ton of investment books. You can try Damodaran's Investment Philosophy course lectures on YouTube. He'll give an overview of the main investment flavors.

Here's my "process":

- I get ideas by reading a lot: Barron's, WSJ, Fortune, as well as looking at various screeners such as low P/E stocks and companies trading at their 52-week lows. I am skeptical of large cap stocks in the billions, as those are picked over fairly well. Large funds have too much money they need to put to work to invest in a $250MM company, so analysts don't follow them much. These are prime candidates for gaining an edge.

- Then I pull their annual (and quarterly) reports. The AR will give you a feel for the business, how it makes money, growth strategy, etc. A lot of times I don't feel comfortable with my level of understanding and just bail. Sometimes I'm uncomfortable but keep reading for educational purposes, but in the back of my mind I've already firmly placed this in the "pass" category. I also start looking at the industry as a whole and competitors. I start to formulate an opinion on where the business is in general and what the key variables are. Again, the default here is to pass.

- Once I have a feel for the business, I start looking at the numbers, very roughly. Growth, margins, ROC, debt levels, and similar tell the truth about how good of a business this is. I especially look at how these numbers change over time. I look at free cash flow (FCF), but always in tandem with the companies reinvestment needs. More companies go in the "pass" bin during this stage for various reasons, e.g., high ratio of debt to FCF, where one hiccup and they're toast.

- At this point I have a good business with what looks like good numbers, but I need to know a) can I get it for a good price, and b) why?

I figure out what I think is a fair value for the entire business at current conservative levels. I use DCF (you could use multiples I suppose), but I am purposely fuzzy on the numbers, e.g., I round a lot as a constant reminder that I do not know the future! I also play with the inputs (engineers might call it sensitivity analysis) to get a rough range of a fair value.

- I can then see what it's actually trading for. This is why many of my initial filters look for 52-week low stocks and the like, cause otherwise you'll spend a lot of time getting here just to see it's trading for 2x what you think is a fair value.

- The 2nd half of the question, is why is this trading at what I think is a discount? The best candidate company is currently unloved for some reason. Your job is to figure out why.

- Now you are at a point where experience matters, and why Buffet tells his fans to read, read, read. Whatever reason this stock is currently depressed; is it temporary or permanent? If it's temporary, will the company survive (even if things get worse)? You need some kind of edge or insight here, and your general business experience will guide your thinking.

I try to evaluate all possible outcomes and what my annual return will be in each case, and am looking for a margin of safety. Basically, even if things stay bad, will I end up ok? Your best luck here is some kind of safety net to prop up the value close to where you get in, like liquidation value (but be careful here). Think like a business-person.

More often than not, I have no special insight into the current environment and I pass. Every now and then, though, the market gets it wrong. This is your fat pitch and this is the time to swing.

- To keep this somewhat brief, I'll just say there is a ton of nuance, so read books to get more ideas on what to look for. Also know what you're looking at: analyzing Collector's Universe (CLCT, $160MM cap) is different than analyzing Disney, with different investment timeframes, so certain things matter more than others. And both of these are different than looking at a net-net (what Buffet calls a cigar butt, or Graham-style stock).

As the above suggests, not many companies make it all the way through, and that's ok. I read an interview with Mohnish Pabrai recently, and he said something very smart. He said the investor should act like a lady / gentlemen of leisure, casually reading each and every day, keeping an eye out for opportunity, but without the constant impulse to act.

As a beginner, you can even tell yourself as you begin reading that you are not investing, you are just learning. Keep investing in index funds while you learn. You may surprised when a juicy one comes your way.

As for reading, someone else gave some good recs, and you're already reading Graham, so if you've decided "value investing" is for you, I would recommend

- Common Stocks and Uncommon Profits - Fisher. The "scuttlebutt" method for finding good companies. This is good advice in general for learning more about industries.

- One Up on Wall Street - Lynch. High level advice, but good stuff.

If these 2 and TII are a chore for you, then (value) investing is probably not for you. If you like them, then try these:

- Investment Valuation - Aswath Damodaran. The grandaddy of technical valuation. Basically the textbook on doing DCF. Personally I don't obsess over the numbers at this level of detail, but you should learn it. (If a situation is close enough where an 8% discount rate vs. 9% will make the difference between go / no-go, then I am a no-go).

- The Dhando Investor - Mohnish Pabrai. His analysis of Patel's is kinda goofy, but the last half of the book is excellent, and probably the most straightforward advice I've seen for smaller portfolio value investors. He counterbalances the common thought of looking for those 20+ year stocks with his 2-3 year investment method.

- A good Accounting book if you don't already know this stuff.

- Money Masters of our Time - John Train. This will expose you to a lot of different "master" investors with different styles.

This is already too long, and scatter-brained, but I could go on all day about this stuff. If you enjoy the process there's really nothing like it; it's like treasure hunting!

Thanks so much...you stitched it all together really well.

This is really great. I wonder if something like this could be compiled for other great people respsective to their industry. e.g. Carmack FAQ or Musk FAQ

His letters to shareholders are real gems: http://amzn.to/1UrANYO

Took me a month or 2 to read them all.

This is a very nice collection of Buffett QnAs.

It would be interesting to see these in a timeline to see how his various answers have changed (or not) over time.

This is great. I wonder if there's a way to package it up for an e-reader, or as a PDF?

Very comprehensive but some answers can be very dated.

Probably incorrect forecast (2008):

> WB: Charlie, what is your over/under for oil production in 25 years?

> CM: Oil in 25 years? Down.

25 years is a long time!

Only 18 years left.

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