Knowledge grows through sharing! To be the best, learn from the best! May all your dreams come true! Collections of Value Investing articles, interviews and videos, especially on Warren Buffett and Charlie Munger and articles from various disciplines to build "Latticework of Mental Models"
1) Be selective
2) Be Disciplined
3) Control your emotions
4) Understand how each opportunity has a different value
5) Walk away when it's going against you
-----------------------------
To read the complete Motley Fool's article.
You may be interested in an up close and personal online video interview with Kevin Clayton, CEO of Clayton Homes, the largest manufacturer of factory built homes in the United States and a wholly owned subsidiary of Warren Buffett's Berkshire Hathaway.
Kevin Clayton discusses all aspects of his business from getting started, to taking over from his father, and to selling to Warren Buffett.
This video may help you understand the qualitative aspects that Warren Buffett may consider when making an investment.
See if you agree that this interview may actually showcase one of the possible candidates who may eventually succeed Warren Buffett as CEO of Berkshire Hathaway.
To view this video (free for a limited time): Google Video.
Viewing time is 57 minutes
----------------------
Enjoy,
David
--------------
The most expensive stock in the U.S. passed a unique plateau Thursday, as the price for a Class A share of Warren Buffett's Berkshire Hathaway Inc. (BRKA, BRKB) briefly surpassed $100,000.
News from International Herald Tribune (Oct 3, 2006)
--------------
Congress passed legislation over the weekend that would make it a crime to use credit cards or online payment systems for Internet betting. As a result, several online-gambling companies said Monday that they planned to stop doing business with customers in the United States — by far the largest market for Internet gambling.
PartyGaming, which generates 78 percent of its revenue in the United States, said it would suspend all “real money” transactions with United States-based customers if President Bush signs the bill into law, as is expected within the next two weeks.
--------------Without doubt, PartyGaming's shares have plunged significantly; dropping over 60% in one day. Stopping online transactions for online gambling would literally abolish PartyGaming's lucrative revenue from US customers and would shrink its revenue by over 75%!
As I have recommended PartyGaming Company for my Lau Model Portfolio, I believe that it would be useful to bring it up for discussion and reflection. As Buffett said, always learn your mistakes and the mistakes of others and most importantly, do not repeat them!
When I first evaluated PartyGaming, I was very enticed by its huge growth potential. PartyGaming is the market leader in online poker and online casino. It is 3 times bigger than the next online poker competitor. Also, it uses in-house software, understands the needs for excellent customer services, introducing more games like PartyGammon, targeting non-US customers, etc.
As I mentioned before, the biggest risk that PartyGaming faces is the "illegal status of online gambling" in US. Initially, I judged that it was a low probability event as
1) It is hard to regulate
2) It doesn't make sense to make online gambling but sparing other gambling like horse betting
3) US has tried on numerous occassions to ban online gambling but to no avail
4) It is legalised in UK and US as a "UK partner" should be on the same side as UK
5) World Trade Organisation ruled last year that US laws on online gambling contravened its rules.
Now, it seems that online gambling in US is in jeopardy. It is very highly likely that online gambling would not be able to survive in US as they enact the ban on online credit cards transactions for online gambling.
So, what have I learnt from this meltdown.
1) Margin of Safety: It is paramount to calculate margin of safety prior to investing. In this particular case, as I have minimised the risk of PartyGaming, margin of safety that I have calculated was not sufficient to cover the severe plunge of PartyGaming shares price.
2) Diversification: When I said diversification, I don't mean buying 100 stocks. :) If you are an experienced investor, Joel Greenblatt mentioned that 6-8 stocks would be a sufficient diversification of portfolio.
3) Cost averaging down: If you are confident in the company's future, cost averaging down will create a superior return in the long run. Our famous Bill Miller emphasized that he always buys more in the company that he invests. Nobody knows where is the bottom, and by averaging down, you will get to own the companies that you like at a very attractive price. Even Warren Buffett doesn't know when is the bottom.
My current view on PartyGaming:
-----------------
PartyGaming is a well-run, cash-generative company and a great market leader in online poker and online casino. Despite losing significant amount on revenue from US market, it will still grow big and strong over the years. It has great potential in non-US market. Personally, I'm going to cost average down.
I believe that current uncertainty and pessimism creates great buying opportunity!
-----------------
Further suggested reading:
1) Guardian Limited: Online gaming firms consider legal challenge to US ban
2) Gambling911.com: Former New Jersey Attorney General doesn't see online gambling legislation lasting
IMPORTANT: Due your own due dilligence prior to investing.
Happy learning and growing,
Dah Hui Lau (David)
I was thinking about the best way to beat an Index. This idea ( Wild one at that ) has been in my mind for a week now.
A certain part of the portfolio is invested in the index ( Let's say an equal number of shares of all the companies in the BSE 500 ) And a certain part in Value opportunities.
The ratio can be 1:1.
Upside -
a) You copy the index to some extent and thus dont perform too badly in relation to it. ( Depends on the ratio again )
b) You can best the index using value investing methods of stock selection ( you wont beat it my much overall, but you'll still beat it )
------------------------------------------------------
Email 2 from myself
------------------------------------------------------
The best way to beat the index is through value investing as you know.
It doesn't make sense to invest a portion of your money in the index. I'm sure you want to beat the index handsomely and not just tracking it.
As long as you are sufficiently diversified with at least 6-8 stocks, you will do well over the long-term. It is extremely hard to beat the index year in and year out, like Bill Miller. Super-investors like Charlie Munger, Tweedy Browne, Lou Simpson are great investors, but on average, lose to the index 1 in 3 years. But, their compound returns were much more superior than the index.
The most important thing is to outperform the index in the long-run and it doesn't matter to underperform once in a while.
------------------------------------------------------
Email 3 from Koushik Sekhar
------------------------------------------------------
What you suggest is being done rampantly by many mutual funds at least in India and I am sure in other parts of the world too ! It has got another name - "closet indexing" where they claim to be managing the money but in effect they are only closet indexing. Of course the ratio they use is perhaps 80% index and 20 % cheap shares !
I think this is a short cut for those who have severe short term performance pressures and those who dont really want to underperform the index in any period and in return are willing to give up large outperformances of the index in most periods.
By putting the entire fund in the same cheaper/value shares they will surely do better in the long term but they risk underperforming in some periods.
Why would any sane private value investor not accountable to the wrong type of committees or customers who want "action" want to become a closet indexer ? In effect, to the extent you track the index you will give up the advantage of being a value investor. Suppose you are 80% index and 20% value you are only a 20% value investor !
I am attaching a report by Tweedy which compared the performance of champion value investors who have beaten the market over 10 -15 years by a very large amount. See p 6-7 for the section titled as follows
Is Underperforming an Index 30% to 40% of the Time a Normal Part of Long-Run Investment Success? What we learned from an examination of the year-by-year results for nine value-oriented investment managers with index beating long-term records.
There is one striking feature - up to 33% of the time some of them have underperformed the index. Also when they underperform the margin of underperformance is low but when they outperform they really outperform. See Charlie Munger's record with his penchant for severe concentration.
------------------------------------------------------
Email 4 from Mayank Sharma
------------------------------------------------------
I am not departing from the value approach but was trying to figure out different techniques.
Now, I at least know what closet Indexing is. It's actually a very shrewd way of keeping very nifty customers. I guess, most of the closet indexing would be carried out by open ended mutual funds. This way they would make sure that they can claim that they beat the index for x number of years continuously and attract more funds.
And the document Superinvestors of grahamsville and doddsville by Warren buffett just proves your point.
This also has to do with the loss aversion principle. There is a paper on loss aversion by Nassim Taleb. I read it a long time back but I remember he talks about asymmetric payoffs and people's dislike for it. I love the way he makes money. He entire investing philosophy is based on taking small losses for periods whose duration is unknown and then getting a big payoff because of the occurence of one event ( maybe a change in the level of the index because of an unexpected event)
Happy learning,
Dah Hui Lau (David)
P.S. Send me an email of our thought on portfolio construction.
Charlie Munger gave an insightful speech a few years ago at Harvard Law School on "24 Standard Causes of Human Misjudgment." The message has powerful implications for investors. Whitney Tilson summarizes some of the key points......
Bias from consistency and commitment tendencyMunger explains this bias with the following analogy: "The human mind is a lot like the human egg, and the human egg has a shut-off device. When one sperm gets in, it shuts down so the next one can't get in." In other words, once people make a decision (to buy a stock, for example), it becomes extremely unlikely that they will reverse this decision, especially if they have publicly committed to it........
Big-shot businessmen get into these waves of social proof. Do you remember some years ago, when one oil company bought a fertilizer company, and every other major oil company practically ran out and bought a fertilizer company? And there was no more damned reason for all these oil companies to buy fertilizer companies, but they didn't know exactly what to do, and if Exxon was doing it, it was good enough for Mobil, and vice versa. I think they're all gone now, but it was a total disaster....
------------------------------To read the complete article.
Happy learning,
David
In the long run, trading KILLS! The best thing to do is to learn what works in investing. So, please read...
What has Worked in Investing by Tweedy, Browne Company LLC.
Happy investing,
Dah Hui Lau (David)