“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1." - Warren E. Buffett

Saturday, November 29, 2008

Share Market and Investing - Warren Buffet

Dear followers of mine, and this blog,
I think i was lucky to go through this article, an interview with the legend, the King of share trading, Warren Buffet, even though it is already on the web world, i thought there is nothing wrong in having it here one more time since, it is so valuable that every one should go through this interview with the legend Warren Buffet, it is so simple and superb. I felt so bad that could not be there in the crowd to listen him give his experiences and tips, just go through this and read deeply you will be in a position to see and smell the diamond.

I had the good fortune to attend the 2008- Berkshire Hathaway Shareholders meeting at Omaha, Nebraska a few wee It was a wonderful experience listening to and learning from the Master Investor- Warren Buffett himself and all I can say is that he stands alone as the reigning deity of financial world's Mt Olympus!
The degree of humility and composure he exhibited, although he is the richest and most well respected human is stunning!
I tried to take some notes and would like to share with you some of the best questions and answers which came across during the conversation between we mortals and God.
Having read about him, observed him and worshipped him for a few years now, I think it is reasonable to believe that this guy is exactly what he seems: a plain-speaking, tee totaling man of uncrackable integrity who works really, really hard and sticks to his investing and management principles through boom and bust which makes him a freak of nature since he is above normal human tendencies. He is like a comet streaking through the heavens every 75 years or so.
The questions the shareholders threw at him for 7 continuous hours ranged from finances, life, religion, career, politics, sports and several other streams. And he answered everything with a Zen like calm and confidence.
Even if you are least bothered about investments and finances, I insist, Pl read on. ================
Q1.What does it take to become a successful investor? Brilliance or Smartness?

Neither, Success in investing doesn't correlate with I.Q. Once you have ordinary intelligence, what you need is the temperament to control the urges that gets other people into trouble in investing.

Q2.When do you deicide to invest in a firm?

The best thing that happens to us is when a great company gets into temporary trouble. We want to buy them when they're on the operating table. (Mr. Buffett bought Coke when it had its biggest fiasco after launching New Coke; he bought American Express when it went through a loss making phase in the early 60's)

Q3.What do you look for in people when they come to sell their firms to you?

I don't look for the usual credentials such as an MBA, a pedigree (Harvard, Wharton), or cash reserves or market cap of their firm. What I look for is just a passion in their eyes; I think that's the key. A person who is hungry will always do well. I prefer it when people even after selling stay on and work for the firm; they are people who can't wait to get off their bed to get to work. Passion is everything; there is no replacement for innate interest.

Q4.Mr. Buffett, you told us that Berkshire Hathaway has $ 45 Billion in cash. Why aren't you investing?

Up until a few years back I had more ideas than money. Now I have more money than ideas.

Q5.When do you plan to retire?

I love my job; I love it so much that I tap dance to work. Mrs. B, the founder of Nebraska Furniture Mark worked until she was 104, she died within 6 months of her retirement, that's a lesson to all my managers, don't retire! I personally am going to work 6-7 years after I die, probably that's what they mean when they say- "Thinking out of the Box"!!

Q6.Why do stock market crashes happen?

Because of human nature for greed and insecurity. The 1970s were unbelievable. The world wasn't going to end, but businesses were being given away. Human nature has not changed. People will always behave in a manic-depressive way over time. They will offer great values to you."

Q7.What are the things that are taught wrong in Business school and the corporate world?

I like such open ended questions, I think Business schools should refrain from teaching their wards about profit making and profit making alone, it gives a sense of 1 dimensional outlook to the young students that loss is a curse. In reality, in the corporate world, failure and loss making are inevitable. The capital market without loss is like Christianity without hell. I think they should teach the student on how to buy a business, how to value a business? Not just on how to determine the price of a business. Because price is what you pay, value is what you get.

Q8.Do you still hate Technology stocks?

With Coke I can come up with a very rational figure for the cash it will generate in the future. But with the top 10 Internet companies, how much cash will they produce over the next 25 years? If you say you don't know, then you don't know what it is worth and you are speculating, not investing. All I know is that I don't know, and if I don't know, I don't invest."

Q9.How to think about Investing?

The first investment primer was written by Aesop in 600 B.C. He said, 'A bird in the hand is worth two in the bush.' Aesop forgot to say when you get the two in the bush and what interest rates are; investing is simply figuring out your cash outlay (the bird in the hand) and comparing it to how many birds are in the bush and when you get them."

Q10. How do you feel after donating $ 40 Billion to the Bill and Melinda Gates foundation? You are a hero to us!

I feel nothing. I haven't sacrificed anything in life. Ihave had a good life. I donated after I turned 75. I think I admire those people who sacrifice their time, share their food and home, as the people to be emulated not me. Besides, what is money before a man's life?

Q11.What do you think are the pitfalls in donation?

I have never donated a dime to churches or other such organizations; I need to believe in something before I end up doing that. I have been observing the Bill & Melinda Gates foundation for years now and I am confident they will do a fantastic job of making use of the money. I am a big believer in Outsourcing, others believed in me as an Investor and gave their hard earned money to invest. I believe in Bill Gates, he is a better donor than me.

Q12.Why do you work from Omaha and not Wall Street, New York?

Wall Street is the only place where people alight from Rolls Royce to get advised by people who use the Public transportation system.

Q13.You seem to be so well read, tell us how it all started.

My father was a stock broker, so we had all these financial books in our library. He introduced me to those classics and I got into them. I am lucky that my father was not a fan of Playboy! Reading is the best habit you can get. Well, you can learn from teachers too, and have mentors but there are so many constraints attached- they will talk fast, talk slow, they might talk like a pro or they might be terrible communicators. Books are a different animal altogether, I love reading! The beauty about reading and learning is that the more you learn the more you want to learn.

Q14.People who join Berkshire Hathaway seldom leave. How do you get along well with all your executives?

I try to get quality people. I always say - Hire someone in your organization who is better than you are. If you do that, you build a company of giants. If you get people worse than yourself, you build a company of dwarfs. And do not try to do everything yourself. Delegate the jobs and look out of the window. The results will come. That's how you build institutions. It happens only when you empower others, believe in others. Iam an investor, Iam very secured at that, I have no clue how to make Coca-Cola or how to dole out credit cards (MrBuffett owns 8% of Coca-Cola and 13 % of American Express). I understand the wisdom of the aphorism that you cannot please all the people all the time. Of Course, you will always find qualities that you don't like in people around you, but if you observe carefully the love of the work unites you both. There is no point in being obsessive about a bad quality in a person, whom you otherwise respect.

Q15.I am a small time businessman from Dallas, Texas, what do I need to do to hit big time?

Be patient, Achieving your financial goals and dreams will not happen overnight. As much as we would all really love to accomplish our goals in a few years, this is an ongoing process. Defining your financial goals is not a one-time task; you need to keep adding new plans at different stages in your life. We all admire the skills of Olympic ice skaters, pro golfers, and concert pianists. But do we remember that they didn't acquire their skills overnight? They had to practice hours on end for years to achieve their dreams. The key to success is to continue learning throughout your life with a voracious appetite.

Q16. I think it is marvelous that you have had a golden run with investing, how did you do that?

My rule is to be fearful when others are greedy, and be greedy when others are fearful. Besides, I call investing the greatest job in the world because you never have to swing. You stand at the plate; the pitcher throws you General Motors at 47! U.S. Steel at 39! And nobody calls a strike on you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it. Stay dispassionate and be patient. You're dealing with a lot of silly people in the marketplace; it's like a great big casino and everyone else is boozing. If you can stick with drinking Coke, you should be OK. First the crowd is boozy on optimism and buying every new issue in sight. The next moment it is boozy on pessimism, buying gold bars and predicting another Great Depression, most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.

Q17.Mr. Buffett you have seen so many crashes and recessions, your take on facing recessions and stock market crashes?

If past history was all there was to the game, the richest people would be librarians. Every scenario is different. But always remember, Tough times do not last. Tough people do.

Q18.What is the 1 biggest advice you would impart to a young investor like me?

Think for a moment that you are given a car and told this is the only car you would get for the rest of your life. Then you would make sure that you car is taken care of well, it is oiled and detailed every now and then. You would make sure that it never gets rusted, and you would garage it. Think of yourself as that car. You just get 1 body, 1 mind and 1 soul. Take care of it well. Invest in yourself that would be my advice.

Q19.You personally know many of the Financial executives who are engineers of the current turmoil in the financial world, surprisingly even after record losses, those executives receive astronomical salaries and bonuses and arrogantly declare that they deserve it, why dint you advice them from making such decisions and what's your view on their justification for their pay?

I like sharing my ideas but don't like imposing my ideas on anybody. It doesn't make sense and is a waste of time. If somebody has decided that they know everything that is there to know, nobody can help them. The best way to learn and succeed is to know that we know nothing. There is an entire universe out there and still some of us think we can know everything. In the world of investing a few people after making some money tend to imagine they are invincible and great. This is the worst thing that could happen to any investor, because it surely means that the investor will end up taking unnecessary risks and end up losing everything ¡V arrogance, ego and overconfidence are very lethal. Personally I don't feel too comfortable with too much extravagance, because I always think like an investor. My thought process doesn't see a lot of value in a fancy car or a designer suit. Thinking like an investor always is very important to bring in a sense of discipline and focus. Before reading balance sheets and investing you need to make sure your outlook and mindset is that of an investor. Never let ego, arrogance and over-confidence control you - not just as an investor but also as a human being. You will never have internal peace if you are unable to look at everybody around you with love, compassion and understanding. Irrespective of who the person is, he or she can teach you something you don't know. I have learnt so much from people all around me and I wouldn't have been able to learn all these wonderful things if I had not spoken to them with a smile. To quote Sir Isaac Newton- If I have seen farther than others, it is because I have stood on the shoulders of giants.

Q20.How do you make the Government eat out of your hands? How do you make them agree to everything you do?

If the strategy of a private enterprise matches the policy of the government, the government will be compelled to support you even if they don't like you.


It was a 7 hour conversation and I could just capture some of the best questions and answers. As 37,000+ dazed, amazed and grateful shareholders trooped out of the stadium after the meeting, I found myself recalling one of my favorite quotes-

"A man has to learn that he cannot command things, but that he can command himself; that he cannot coerce the wills of others, but that he can mold and master his own will: and things serve him who serves truth; people seek guidance of him who is master of himself".

Wednesday, November 26, 2008

A way to lock in minimum gains on your investments

This strategy can be used when you are sitting on huge unrealised profits on a stock and want to protect it.

For those who are wondering how to save the hard earned profits in this bearish volatile market here is a simple solutions to lock in minimum gains on your investments. This is a wonderful article by Srividhya Sivakumar, much impressed,and i thought i can give a chance for my readers also to enjoy, just sit in and give a read you will really appreciate the author,which gives a wonderful solution.

After all, it is not an easy task to just sit on the sideline and watch volatility wie away a good chunk of your hard earned profits. But worry not, for there is a way to seal minimum profits on your investments use the protective collar. This simple option strategy can lock in profits on your stock regardless of the constant meandering in the stock markets and that too at little cost. Read on......

Using Protective Collar:
Simple and easy to set, a protective collar strategy should be used when you are sitting on huge unrealised profits on a stock and want to protect it. It can be establised by purchasing a protective put(buying puts at lower strike price) and simultaneously writing a a convered call (selling calls at higher stike price) for the same month on the stock that you hold.

For instance, say you hold 175 shares of ICICI Bank bought at Rs.500. This means you would currently be sitting on an unrealised profit of Rs.200 on a pershare basis, if we take into consideration the stocks current market price of Rs.700. You can lock-in on minimum gains using a protective collar.

A protective collar on your ICICI shares can be set by selling higher price call options on the stock. Depending on what price you would be compfortable parting with your stock holding, you can decide on the strike price of the call option.

Let us say you sell one lot (175 shares) of ICICI september 740 call option trading at Rs.16.5

This means that if the stock price moves above Rs.740 during the period of the contract, you should be willing to sell the shares at the strike price, the second part of the strategy inovlves buying a protective ut on ICICI Bank. You can do this by buying puts at a strike price, which would seal the minimum profits you want to lock in for your share holding.

In this case, you can do so by buying ICICI sep 660 Put option trading at Rs.16.7. This will help you lock ina minimum gain of Rs.160 per share (Rs.660 - Rs 500)

But at what cost? In this example, while selling the 740 call will entail an initial credit of Rs.16.5 a share, the buying of puts will mean a debit of Rs.16.7 a share. So on a net basis, you have set a protective collar for juist 10 paise a share.

Note that different spreads can be chosen depending on your stock price outlook and risk tolerance. Further, in some cases the strategy can also be set at net intital credit.

Possible outcomes:
If ICICI stock price falls much below the strike price of the put option (Rs.660) gains from the long put position will offset the notional loss in the stock's value.However, the sold calls will expire worthless. This means you will get to pocket the premium that you received while writing the call (Rs.16.5). Alternatively if the stock price rises beyond the strike price of the call options (Rs.740) it will result in a loss.
However, this loss to an extent will be offset by the rise in value of your gains on ICICI shareholding. While the put opitoon will expire worthless, you willstnad the risk of exerciese at Rs.740, in which case you may have to part with your stocks. And if the stock price trades in a range between the put strike price of Rs.660 and the call strike price of Rs.740, both the options would expire worthless.
In this case, you lose nothing but the amount spent in setting the spread. But had you set the spread for strike prices that would have resulted in a net initial credit, you would get to pocket that for good.

Current News

PM and FM against the reduction of fuel price.

At present the oil marketing companies are making a profit of Rs.8/- pl petrol, and 0.65 paise for litre diesel. The petroleum ministry is planning to go for a price reduction, which is also questioned by the election commission to furnish the basic reasons behind it, it seems the ministry is getting a good political support for its cause to reduce the price, but to the surprise even though the congress party and the chief is supporting the reduction, the Prime Minister and the Finance Minister are not supporting the idea, where the PM feels the reduction should be considered only when all fuels including diesel and LPG steps up profitable, and FM is supporting this view of the PM.
It seems even after the question from the EC the Petroleum ministry may go through with their idea of cut in fuel price with the congress and the chief supporting the decision.