Coca-Cola 'Freestyles' A Smarter Soda Machine

The Coca-Cola Company has launched a Twitter and Facebook page to bring awareness to a new soft drink dispenser that relies on radio frequency identification (RFID) technology. It has begun to test in the southern California market at a variety of restaurants, such as Carl's Jr., El Pollo Loco, Jack in the Box, and Subway. The smart-machine collects extremely detailed information about drink choices (the dispenser can mix up to 100 different soft drinks) and continually relays it to the company -- the Terminator of vending machines.

The Facebook fan page has more than 1,000 members since the launch at the end of July. Social media will drive traffic to participating outlets.

Coca-Cola Freestyle, the brand name for the fountain dispenser, dispenses more than 100 beverage brands from one unit. While it took more than four years to plan, the platform's design taps RFID technology from Seattle, Wash.-based Impinj.

Monza tag chips and Indy reader chips provide the core RFID capability for the system. It uses RFID to monitor, track and maintain dispenser operations as well as to provide real-time business analytics about product consumption and preferences.

There are 15 dispensers on the market. The network will include 75 by the end of September. Each unit will connect to the Internet and talk back and forth to the main system.

Coke Smart, will let customers who use the machine in their store order from an e-commerce site on the Internet. Coca-Cola also can download new recipes direct to the machine.

Freestyle will let Coca-Cola test new drink flavors, such as adding various vitamin combinations to flavored waters and juices. The dispensers contain 30 flavor cartridges tagged with RFID that mix up 100 different drink combinations. Each dispenser unit contains an RFID reader. The dispensers collect data on customer choice. The systems will collect data on sales, which in turn will give marketers information on where to best market specific products.

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Coca Cola's Bioplastic PlantBottle Coming Later this Year

The Coca-Cola Company recently took the first steps to eventually introduce bottles made with materials that are 100 percent recyclable and renewable. Company's new PlantBottle is due sometime later this year in select markets holding their Dasani brand bottled water and sparking brands.

Coke's Vitaminwater is expected to follow - being packaged in the PlantBottle sometime next year. The PlantBottle is currently made through an innovative process that turns sugar cane and molasses, a by-product of sugar production, into a key component for PET plastic. Manufacturing the new plastic bottle is more environmentally efficient as well. A life-cycle analysis conducted by Imperial College London indicates the PlantBottle with 30 percent plant-based material reduces carbon emissions by up to 25 percent, compared with petroleum-based PET. According to the company, another advantage to the PlantBottle is that, unlike other plant-based plastics, it can be processed through existing manufacturing and recycling facilities without contaminating traditional PET.

Consumers can identify the innovative bottles through on-package messages and in-store point of sale displays. Web-based communications will also highlight the bottles' environmental benefits.

Coca Cola faces a challenge with its new bottle concept from the recycling industry who have long been concerned about contamination from bio and other types of plastics. Industry groups are concerned the current recycling system in the US is not equipped to adequately handle bio plastics.

Was Warren Buffett buying stocks during the second quarter?

Later this week we'll find out whether Warren Buffett was buying stocks for Berkshire Hathaway during the second quarter as U.S. markets rallied.

Berkshire is likely to file its quarterly Form 13F with the SEC late this week, probably after the market closes Friday afternoon. The form, which is required of many institutional investors, will reveal Berkshire's stock holdings as of June 30. Berkshire's last 13F showed the firm's stock holdings as of March 31.

We already know from Berkshire's second-quarter earnings release Friday that the company sold part of its position in ConocoPhillips during the second quarter and continued selling in July. Berkshire also sold some of its stake in Moody's Corp. during the third quarter.

An analysis of the Form 10-Q filed Friday also indicates that Berkshire bought additional shares of Johnson & Johnson and Wells Fargo during the second quarter, as this report also notes.

We'll have the results of Berkshire's Form 13F filing shortly after it's made public this week.

Berkshire Hathaway Bought More Johnson & Johnson and Wells Fargo Company, Sold ConocoPhllips, Held on American Express Company, The Coca-Cola Company

The much anticipated 2Q09 Berkshire Hathaway earning report was release last night. It is “Solid Result in Difficult Times”. This Blog readers would be anxious to know what stock Warren Buffett bought for Berkshire Hathaway for the quarter. We can determine that he bought some more shares of Johnson & Johnson and Wells Fargo, sold more shares of ConocoPhllips, but kept steady on American Express Company, The Coca-Cola Company, Kraft Food, Procter & Gamble.

1. Johnson & Johnson (JNJ)
Johnson & Johnson is engaged in the manufacture and sale of a broad range of products in the health care field in many countries of the world. The company's worldwide business is divided into three segments: Consumer; Pharmaceutical; and Professional. Johnson & Johnson has a market cap of $165.06 billion; its shares were traded at around $59.9 with a P/E ratio of 13.3 and P/S ratio of 2.6. The dividend yield of Johnson & Johnson stocks is 3.2%. Johnson & Johnson had an annual average earning growth of 12.5% over the past 10 years. Berkshire owned 32.5 million shares as of 1Q09 and 38.3 million shares as of 2Q09, so it may have bought 5.8 million shares.

2. Wells Fargo & Company (WFC)
Wells Fargo & Company is a diversified financial services company providing banking insurance investments mortgage and consumer finance services through stores its Internet site and other distribution channels across North America as well as internationally. Wells Fargo & Company has a market cap of $135.31 billion; its shares were traded at around $28.76 with a P/E ratio of 32.2 and P/S ratio of 2.6. The dividend yield of Wells Fargo & Company stocks is 0.8%. Wells Fargo & Company had an annual average earning growth of 10.8% over the past 10 years. Berkshire owned 302.6 million shares as of 1Q09 and 316.8 million shares as of 2Q09, so it may have bought 14.2 million shares.

3. ConocoPhillips (COP)
ConocoPhillips is a major international integrated energy company with operations in some 49 countries. ConocoPhillips has a market cap of $65.29 billion; its shares were traded at around $44.07 with a P/E ratio of 7.3 and P/S ratio of 0.3. The dividend yield of ConocoPhillips stocks is 4.2%. ConocoPhillips had an annual average earning growth of 19% over the past 10 years. Berkshire owned 71.2 million shares as of 1Q09 and 64.5 million shares as of 2Q09, so it may have sold 6.7 million shares.

Other Top Holdings
The 10-Q Listed the other four top holding positions: American Express, CoCa-Cola, Kraft Foods, and Procter & Gamble. It appears he has held those positions steady.

American Express Company is primarily engaged in international credit card and banking services throughout the world. American Express Company has a market cap of $38.17 billion; its shares were traded at around $32.69 with a P/E ratio of 24 and P/S ratio of 1.4. The dividend yield of American Express Company stocks is 2.2%. American Express Company had an annual average earning growth of 1.3% over the past 10 years. Berkshire holds 151.6 million shares.

The Coca-Cola Company is the world's largest beverage company and is the leading producer and marketer of soft drinks. The CocaCola Company has a market cap of $114.22 billion; its shares were traded at around $49.34 with a P/E ratio of 16.3 and P/S ratio of 3.6. The dividend yield of The CocaCola Company stocks is 3.3%. The CocaCola Company had an annual average earning growth of 5.3% over the past 10 years. Berkshire Hathaway has 200 million shares.

Kraft Foods Inc. is the largest branded food and beverage company headquartered in the U.S. and the second largest in the world. Kraft Foods Inc. has a market cap of $42.27 billion; its shares were traded at around $28.7 with a P/E ratio of 15.1 and P/S ratio of 1. The dividend yield of Kraft Foods Inc. stocks is 4.1%. Berkshire owns over 130 million shares of KFT.

The Procter & Gamble Company manufactures and markets a broad range of consumer products in many countries throughout the world. The Procter & Gamble Company has a market cap of $151.65 billion; its shares were traded at around $52.03 with a P/E ratio of 14.5 and P/S ratio of 1.7. The dividend yield of The Procter & Gamble Company stocks is 3.5%. The Procter & Gamble Company had an annual average earning growth of 10.8% over the past 10 years. Berkshire owns over 90 million shares of PG.

Why He’s Warren Buffett — and You’re Not

Warren Buffett has already told the world what he’s doing in this frightful market. The Oracle of Omaha proudly proclaimed that he’s “been buying American stocks” with his personal funds.

But it should also be noted that Buffett has been putting his investors’ money on the line as well. After sitting on piles of cash for several years and lamenting the lack of attractive opportunities, Buffett has made several key acquisitions through his investment conglomerate, Berkshire Hathaway, culminating in a flurry of late- September and early-October deals.

In just a two-week span, Buffett picked up Constellation Energy for the relative bargain price of $4.7 billion. He bought $5 billion in preferred stock from Goldman Sachs, receiving a fat 10% yield. And he purchased $3 billion in preferred shares of GE, also yielding 10%.

This doesn’t mean Buffett is saying go out and buy Goldman or GE (GE) stock. In fact, there are plenty of reasons why you shouldn’t try to follow his lead, not the least of which is the fact that Berkshire gets deals that individuals simply can’t.

But that’s not the point. The opportunity here is to pick up some valuable investing wisdom from the greatest practitioner alive. In this spirit, here’s what I think you can learn from Buffett’s moves:

Be Greedy When Others Are Fearful

It’s the most famous of all Buffett-isms: “Be fearful when others are greedy and greedy when others are fearful.” Today there’s ample evidence that people are scared, as fund investors have been redeeming record amounts of money from their stock portfolios.

By contrast, Buffett is putting his money to work. Berkshire’s cash balance, by my estimate, is at its lowest level in recent memory.

Now, this doesn’t mean the market will turn around tomorrow. But Buffett’s point is that this is not the time to flee U.S. stocks. In fact, now is a great time to be looking for shares of high-quality firms that have been beaten down to affordable levels.

For examples of attractively priced industry leaders, see the suggestions to the right.

Don’t Be Hobbled by Past Mistakes

Buffett’s investment in Goldman Sachs (GS) was surprising to many, given his frequent digs at Wall Street’s casino culture and a problematic investment he made in Salomon Brothers.

In 1987, Buffett bought a stake in Salomon to ward off a hostile takeover, but the firm nearly collapsed amid a bond bid-rigging scandal a few years later, and Buffett had to step in as interim chairman.

Although the investment eventually worked out - Salomon was bought by Travelers, which merged with Citicorp to form Citigroup (C) - it’s safe to say that it was a longer and harder road than he had anticipated.

Still, Buffett understood that investment banking, for all its recent woes, is an attractive business if managed properly. The group of top-tier firms is fairly small, and it would be hard for a new competitor to break into the business, which gives Goldman Sachs tremendous bargaining power over its customers.

There’s an important lesson in this for individual investors. Just because many financial stocks in your portfolio have imploded recently, it doesn’t mean you should sell out of this sector entirely - or turn your back on these stocks for good.

Don’t Fall in Love With Your Stocks

Buffett is famous for having said that his favorite holding period is “forever.” But he will sell a stock he loves if conditions warrant. For example, late last year, as crude-oil prices were approaching $100 a barrel, Buffett jettisoned his stake in PetroChina (PTR).

Why? After multiplying more than fivefold since he bought it a few years earlier, PetroChina shares had reached fair value, so he sold. Since he cashed out, PetroChina shares have been cut in half.

Chalk this up to a lesson the Oracle learned in the late ’90s. As he admitted in 2003, “…I made a big mistake in not selling several of our larger holdings during the Great Bubble.”

Buffett similarly made what may be one of his best decisions when he sold Berkshire Hathaway’s long-held stake in Freddie Mac (FRE) in 2000. He’s never written about exactly why, but he noted presciently at his 2001 annual shareholder meeting that Freddie Mac’s “risk profile had changed.”

Keep Your Powder Dry

While the rest of the world gorged on cheap credit, Buffett maintained Berkshire’s conservative profile. This hindered his returns when times were good, but having lots of cash on hand enabled Buffett to snap up once-in-a-lifetime deals, like Constellation Energy (CEG).

Buffett, who owns several utilities, jumped on Constellation in September after its shares tumbled from around $60 to his purchase price of $26.50 in a mere matter of days. The result: He nabbed a company that produces nearly $1 billion in earnings a year for less than $5 billion.

Now, you may not be in a position to keep $40 billion in the bank. But as Buffett showed, it’s smart to have some cash on hand for opportunistic purchases. What’s more, there’s nothing wrong with being disciplined enough to turn your back on stocks that you’re not 100% confident in. That’s sage advice.

Why He’s Warren Buffett — and You’re Not

If investing were as simple as mimicking Warren Buffett, then all you’d have to do to retire rich would be to download a free copy of the Berkshire Hathaway annual shareholder letter and shadow the Oracle’s moves.

Given that you’re reading this article instead of relaxing at your seaside villa, it’s clear copying Buffett is no easy task. So as you marvel at the Sage, keep the following in mind:

Warren Can Strike Deals You Can’t

Buffett’s reputation and Berkshire’s financial heft are enormous advantages that regular investors simply don’t share. Take his recent investment in Goldman Sachs (GS). It was made in preferred stock that was offered only to Berkshire and pays a 10% fixed yield.

That’s twice what Uncle Sam is initially earning on the preferred shares it got from Goldman in exchange for injecting capital into the bank. But chalk that up to the Buffett premium. Firms want the Oracle to invest in them for his seal of approval.

Berkshire’s purchase of Constellation Energy offers a great example. Constellation’s shares had fallen 75% from their highs because the market was worried about the financial health of the company’s energy-trading operations.

If you or I bought the stock at that level, we would have been making a bet that Constellation would pull through. But we would not have been able to affect the odds. However, Berkshire’s financial strength and Buffett’s name assured Constellation’s survival, making the investment more valuable as soon as Warren bought the company.

Warren Is Smarter Than You Are

Many casual observers assume that Buffett simply buys great companies and hangs on to them. Simple, right? But the real key to Buffett’s success is far more complicated.

Buffett has created enormous value for Berkshire by buying all kinds of securities, from common stock and preferred shares to currencies, distressed debt and options.

He has also made money through merger arbitrage and fixed-income arbitrage. These are all areas that only the most sophisticated investor should dabble in.

Why Mimic Warren When You Can Hire Him?

Your best bet for benefiting from Buffett’s wisdom is the most obvious: Buy Berkshire Hathaway (BRK.B) stock.
It’s really an investment company. But unlike a fund, it doesn’t charge annual management fees. Buffett has deployed a lot of cash into attractive deals lately, which should add value for years to come.

Source

Warren Buffett wins with US Bankcorp and Wells Fargo

Warren Buffett decided to increase his stake in financial companies such as US Bancorp and Wells Fargo & Co and is reaping the benefits, the billionaires company Berkshire Hathaway Inc bank-related investments shot up 36 percent in the third quarter of 2008 as he dodged subprime lenders.

At the end of September, Buffett’s firm Berkshire ranked as the largest shareholder in US Bankcorp and Wells Fargo according to Bloomberg, whilst Standard & Poor’s 500 Financial Index fell 0.2 percent.

Warren Buffett does have the luxury of time on his side, so he can sit and wait for the right opportunities whilst other players may not have the capital to follow Buffett’s patience.

Buffett, CEO and chairman of Berkshire is the country’s richest man according to Forbes magazine, with Berkshire gaining an average yearly rate of 21 percent over the past 20 years.

Warren Buffett did cut his shares stake in Bank of America Corp from 9.1 million to 5 million after the bank brought Countrywide Financial Corp the troubled bank.

Source: Bloomberg

Some Interesting Aspects About Warren Buffett's Life

1. He bought his first share at age 11 and now he regrets that he started too late!!!!

2. He bought a small farm at the age of 14 with savings from delivering news paper.

3. He still lives in the same small 3-bedroom house in Mid town Ohama, that he bought after he got married 50 years ago. He says that he has everything he needs in that house. His house does not have a wall or fence.

4. he drives his car everywhere and does not have a driver or security people around him.

5. he never travels by private jet. although he owns the world's private jet company.

6. His Company, Berkshire Hathaway, owns 63 companies. He writes only one letter each year to the CEO's of these companies, giving them goals for the year. He never hold meetings or call them on a regular basis.

7. He has given his CEO's only two rules:

• Rule Number 1 Donot lose any of your shareholder's money.
• Rule Number 2 Never forget Rule Number 1.

8. He doesnot socialize with high society crowd. His past time after he gets home is to make some pop corn and watch Television.

9. He doesnot carry cell phone nor has a computer on his desk.

10. Bill Gates, the world riches man met him only 5 years ago. Bill Gates did not think he had anything in common with Warren Buffett. So he scheduled his meeting for only half an hour. But when Gates met him, the meeting lasted for 10 hours and Bill Gates became a devotee of warren Buffett.

11. His advice to Young People:

• Stay away from Credit Cards and Bank Loans. Invest in yourself and remember:
• Money doesn't create man but it is the man who created money.
• Live your life as simple as possible.
• Don't do what others say-listen to them, but do what you feel good doing.
• Don't follow brand names, just wear those things in which you feel comfortable.
• Don't waste your money on unnecessary things, rather spend on those things you really need.
• After all its your life, so why allow others to rule your life.

THE HAPPIEST PEOPLE DONOT NECESSARILY HAVE THE 'BEST' THINGS, THEY SIMPLY APPRECIATE THE THINGS THEY HAVE.

Warren Buffett says automakers need bailout or bankruptcy

Billionaire investor Warren Buffett says U.S. automakers need a new business model to better compete, whether it takes bankruptcy or a government bailout to achieve.

Warren Buffett also says he would never serve as U.S. Treasury Secretary. The Berkshire Hathaway Inc. CEO is a member of President-elect Obama's Transition Economic Advisory Board.

Warren Buffett says any automaker bailout package should include a business solution, and be negotiated by the president, not Congress. Buffett spoke to Fox Business News in an interview scheduled to air Friday afternoon.

Warren Buffett says the government should insist top executives at Ford Motor Co., General Motors Corp. and Chrysler LLC invest a significant percentage of their own net worths in the Detroit-based companies, ensuring both executives and taxpayers would share in any profits or losses.

Source

Warren Buffett sees 'very painful' five months

Warren Buffett expects a "very painful" next five months for the economy but believes it will recover starting in mid-2009.

In an interview with Fox Business Network, to be aired at 3 p.m. Friday Central Standard Time, Warren Buffett says the Federal Reserve's prediction of a 5.9 percent unemployment peak is "just plain wrong." He says the rate will pass 8 percent.

Warren Buffett also says he would not accept the job of U.S. Treasury secretary, that the proposed auto bailout plan has a fundamental flaw and that Goldman Sachs will survive the current crisis.

Warren Buffett says the price decline of Berkshire Hathaway Inc. stock -- to its lowest level since 2003 -- "doesn’t make any difference" as long as investors haven't borrowed money to buy it at a higher price.

"I look to the business to determine my results. I'll say it's happened to me three other times in my life, too," in 1974, 1987 and bertween 1998 and 2000, he said. "I hope I live long enough so it happens a couple more times to me (Warren Buffett).”

Warren Buffett on Market Meltdown: It's Happened Before And It's Been Even Worse

Warren Buffett doesn't appear to be worried about multi-year lows in the stock market. In a videotaped interview with Liz Claman of Fox Business Network, a smiling Warren Buffett says:

"Well, it's happened before. It's happened a lot worse than that. I mean, in 1929, it went from 381 down to 42, an 89 percent decline. So, we've had it. I mean, most people don't even remember from '37 and '38 that it went down 50 percent, for example...

That 66 to 11497 for the Dow in the last century was not in a straight line. A capitalistic system overshoots, it overshoots in markets, it overshoots in terms of leverage and all kinds of things. But it works very well over time."

As for Berkshire's sharp stock drop that has taken it down almost 50 percent from last December's high, that's happened before, too. Three times. "It happened when it went from 90 to 40 back in 1974 and '5, it happened in 1987, it went down 50 percent, in 1998 to 2000 ... I hope I live long enough so it happens a couple more times to me."

Asked how Henry Paulson is doing as Treasury Secretary, Warren Buffett acknowledged that the economy and markets are in a "very, very tough situation" with "no silver bullets" available to make everything better immediately. "We are in a negative feedback cycle that's going to last for a while."

Warren Buffett predicts that unemployment will get worse over the next several months, although eventually the U.S. economy will recover and "go to new heights." And, no surprise here, he says he wouldn't take the job of Treasury Secretary even if it was offered to him by President-elect Barack Obama, although he's happy to help in other ways. Warren Buffett expects an announcement in the next few days on who will run Treasury.

Warren Buffett jokes that he hasn't been asked and won't be asked. "I'm like a girl sitting at home on Saturday night. I haven't been called. I might like to think I was, but I wasn't."

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Berkshire Hathaway stocks fall after Warren Buffett's risky bets

Bloomberg is reporting that Warren Buffett’s company Berkshire Hathaway is at risk of making massive losses after a series of share market bets by its billionaire owner.

The cost of protecting Berkshire Hathaway debt against default has almost tripled in two months, from 140 basis points to 415, meaning insuring $10 million of debt will cost $415,000 a year.

This is more than four times that of rival insurer Travelers Cos, and worse than the median for companies rated Baa3, the worst credit rating given by Moody’s Investors Service.

According to Bloomberg, the rise in cost is due to billions of dollars of credit-default swaps by the company and a $US37 billion dollar bet against four share markets around the world including the Standard and Poor’s 500 Index.

However, Berkshire Hathaway won’t have to pay out on the bets until 2019, if it indeed does lose them. The company also has around $US4.8 billion cash to invest as a result of the credit-default swaps, despite Mr Buffett previously describing derivatives as “financial weapons of mass destruction”.

Berkshire Hathaway ( Owned by Warren Buffett) stocks dipped below $US100,000 for the first time in two years last week.

Source

$300 million shares of USG Corporation are being sold to Warren Buffett's Berkshire Hathaway Inc

In the deal, it looks like $300 million shares of USG Corp. are being sold to Warren Buffett's Berkshire Hathaway Inc. and $100 million to Fairfax Financial Holdings Limited. This is not a new investment for Buffett. Berkshire Hathaway already holds the largest independent share of this stock.

The notes will bare a rate of 10% initially. USG will also seek shareholder approval to allow conversion of the notes into shares of USG common stock and if approved these will come at a conversion price of $11.40 per share.

Here is where this deal gets interesting. If shareholder approval is not obtained prior to the 135th day after closing of the sale of the notes, the notes will come to 20% per year until after shareholder approval is obtained.

This shareholder approval should be easy to get considering that Berkshire owns a significant chunk of it already. Berkshire Hathaway (Warren Buffett) and Fairfax have agreed to vote all shares in favor of the proposal to permit conversion of the notes.

As per Sep 08 share holding of USG Corp., Warren Buffett is holding 17,072,192 shares of USG Corp.

Source

When Value Means Nothing

After the success of Warren Buffett, there is a whole class of investor called the value investor. Normally, this is not a bad way to invest; some of the most famous investors of all time used this method. The first official value investor I’m aware of is Benjamin Graham. Graham is the man who defined and codified this investing style in the book, "The Intelligent Investor." The most notable recent icon of value investing has to be Warren Buffett.

Pure value investing assumes that, in the long run, if your estimation of the value of a company and stock are correct and you buy a stock that is undervalued, the market will eventually recognize it and reward you with profits. Graham himself famously said in The Intelligent Investor, "In the short run, the market is a voting machine, but in the long run it is a weighing machine."

When the market is rational, value investing is a viable and generally profitable investing method. However, during manias (where greed controls) or during crashes (where fear controls), the method breaks down because the market is no longer rational; it’s emotional. Manias and crashes are stages where the market is clearly ONLY a voting machine.

In both crashes and in manias, you cannot count on rational valuation to protect your investments or to use as a basis for investing, respectively, since most investors are not acting rationally. Therefore, do not take comfort in your value assessments of stock investments in the current crash. As Lord John Maynard Keynes, one of the most famous economists in history, famously said, “The market can stay irrational longer than you can stay solvent.”

If you’re waiting for the “long run” to bail you out, remember another of Keynes’s famous sayings: “In the long run, we’re all dead.”

Welcome to the 2008 market crash.

Source

Buffett not immune to derivative troubles

If you are a Berkshire Hathaway Inc. shareholder right now, you might be questioning just how well you knew Mr. Warren Buffett after all these years. The “Oracle of Omaha,” who famously wouldn’t invest in Microsoft Corporation because he didn’t understand the business, the same man who prudently called derivatives “financial instruments of mass destruction,” couldn’t help but play with fire himself.

Of course, it was widely known that Berkshire Hathaway was involved with credit default derivative transactions worth some $40 billion as it is clearly stated in its financial reports, but the long-term (often 20 years) nature of the contracts combined with Buffett’s aura of invincibility allowed people to put his derivatives in a different category from other people’s.

Unfortunately, with the cost of protecting its own debt from default over the next year having more than doubled over the last two months – from 140 to 388 base points – investors are starting to wonder just how immune Berkshire Hathaway actually is to all the ongoing financial turmoil.

Source

Buffett's Berkshire Falls Most in at Least 23 Years

Warren Buffett's Berkshire Hathaway Inc. fell the most in at least 23 years, dropping for the eighth straight day since reporting a 77 percent decline in third- quarter profit.

The stock plunged $11,550, or 12 percent, to $84,000 in New York Stock Exchange composite trading and has slipped 41 percent this year, compared with the 45 percent drop in the Standard & Poor's 500 Index. Berkshire, based in Omaha, Nebraska, rose in 17 of the past 20 years.

``There's nothing fundamentally wrong with Berkshire, what's really happening is people are wondering if there's something fundamentally wrong with the economy, and Berkshire is in some ways a bit of a proxy for that,'' said Michael Yoshikami, president of YCMNet Advisors in Walnut Creek, California, which manages $850 million including Berkshire shares.

Berkshire has posted four straight profit declines, the worst streak in at least 13 years, on falling returns at insurance businesses and investment losses. Buffett, ranked by Forbes magazine as the richest American, has committed at least $28 billion this year to acquire companies, finance buyouts and purchase securities as prices fell and competitors were hobbled by limited access to credit.

Berkshire's shareholder equity, a measure of assets minus liabilities, fell by about $9 billion in October on declines in debt and equity markets, the firm said Nov. 7. American Express Co., the credit-card company that is one of Berkshire's top 10 stock holdings, plunged 47 percent since Sept. 30 as borrower defaults increased. Wells Fargo & Co., Berkshire's No. 2 investment, dropped about 35 percent.

`Under Pressure'

``Many of the companies Berkshire owns, such as American Express, are under pressure,'' Yoshikami said. ``What you're seeing is a systematic de-leveraging process taking all financials down, including good-quality financials.''

Berkshire shareholders including Mohnish Pabrai, head of Pabrai Investment Funds, have said investors are concerned about losses on the company's $37 billion bet on world equity values more than a decade from now. Buffett sold contracts to undisclosed counterparties for $4.85 billion protecting the buyers against declines in four stock indexes including the S&P 500.

Under the agreements, Berkshire will pay as much as $37 billion if, on specific dates beginning in 2019, the indexes are below the point where they were when he made the agreements. By Sept. 30, Berkshire had written down the contracts by $6.73 billion as the S&P declined for a fourth straight quarter.

Credit-Default Swaps

The cost to protect against Berkshire being unable to meet its debt payments, based on credit-default swaps, has more than tripled in two months.

The swaps jumped to 475 basis points today from 129 points two months ago, according to CMA Datavision. That translates to $475,000 a year to protect $10 million for five years.

Source

24 tips on How Warren Buffett earns money?

“An investor needs to do very few things right as long as he or she avoids big mistakes. ” Warren Buffett

One of the world’s most successful investors, Warren Buffett is the richest man on earth. Chairman of the Berkshire Hathaway, Buffett’s wealth jumped by $10 billion to hit $62 billion during 2007. Buffett’s life is an inspiration for investors across the globe.One of the world’s most successful investors, Warren Buffett is the richest man on earth. Chairman of the Berkshire Hathaway, Buffett’s wealth jumped by $10 billion to hit $62 billion during 2007. Buffett’s life is an inspiration for investors across the globe.

So what makes the world’s wealthiest man so rich? Buffett believes that successful investing is about having common sense, patience and independent research.

’How Buffett Does It’, by James Pardoe is a great guide for investing in any market. A look into Buffett’s simple, yet intelligent mantras for investing and minting millions.

1. A frugal billionaire Buffett believes in simplicity. He advises investors to take easy decisions. Never buy when you are doubtful. Invest only if you understand the businesses well.

2. Focus on not losing money rather than making it. Don’t own any stock for 10 minutes that you wouldn’t own for 10 years.

3. A proponent of value investing, he believes that one must take decisions on his own. He doesn’t believe in listening to analysts or brokers. The best investing decisions come from oneself.

“It is not necessary to do extraordinary things to get extraordinary results.”

4. Buffett advises to invest in ’old economy’ businesses, companies, which have been around for fifty years and will continue to have a long innings.

5. We have often heard of people suffering heart attacks when markets crash. Well, Buffett advocates a sound temperament for stock market success.

6. You don’t need to be a genius to succeed in the stock markets. People who can stay cool will succeed in the long run. Always keep in mind the hidden costs, from commissions on active stock trading to high mutual fund fees.

7. Buffett always looks at businesses he can understand, look at the profits in the past, long-term potential of the company, good top level management of the company and companies that have a good value proposition. The strategy is to think about the business in the long term.

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

8. Invest in businesses with great management. Always keep a track of the management of the company. The top decision makers have a lot to do with the company’s performance.

9. One of Buffet’s biggest strengths is independent thinking. Many people go by what the experts says or what others do but belief in one’s own judgement is the key to stock market success.

10. Patience pays, says Buffet. He says one must not worry too much about the price of the stocks. What’s more important is the nature of business of the company, earnings capability and its future potential.

11. Don’t target just stocks, look at businesses. How a company performs is key to its stock market performance. You must know the track record of a company before you invest in it.“Price is what you pay. Value is what you get.”

12. Prices keep changing. Don’t get worried by the ups and downs. Investing is all about creating wealth. It’s important to understand the value of a stock than its price.

13. He believes that franchisee businesses are good opportunities to invest in. Avoid hi-tech, complex businesses. Look for businesses that are set to diversify and grow.

14. Never be disappointed when markets fall. Take it as a buying opportunity. Buffet says one must have lesser number of investments with more money in each lot.

15. He advises to avoid diversification. Invest in companies with sound business models. Choose a few good ones and stay invested, it will give you the benefits.

“I don’t look to jump over 7-foot bars; I look around for 1-foot bars that I can step over.”

16. Doing nothing pays at times! One must not jump at price fluctuations and take impulsive decisions.

17. Don’t get carried away by market forecasts. Ignore market swings and remain an investor with a good business sense.

18. Buffett advises to be fearful when others are greedy and greedy when others are fearful. Buy when people are selling and sell when people are buying.

19. Make a list of companies, sectors that you find safe to invest in and try to stick to the list.

20. A sound business, strong management, good fundamental and low stock price should be a must-buy.

“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.”

21. Try to ignore stock charts, says Buffett. They may not give the right indicators. A stock which may have done well earlier may not do so in future.

22. Buffet spends a lot of time on reading and more importantly thinking. Reading helps investors, so spend a lot of time reading about the stocks, companies and markets. A good investor must have a good knowledge base.

23. A good investor also needs to be efficient. Investors may have great capabilities but many do not make use of it. One needs to hone skills to meet the targets.

24. Good investors never rush to make money. They give time, thought and work on investment decisions. The mistakes that others make should be a lesson for you.

Source

A Goldman Opportunity: How Average Investors Can "Out-Buffett" Warren Buffett

Warren Buffett drives a hard bargain. When he invests billions in a company, he can generally get a better deal than the rest of us.

First, he's spending billions. And second, his money carries a 'vote of confidence' from the world's most-respected investor.

That helps explains why Buffett was able to get a very healthy 10 percent annual return on the $5 billion he pumped into Goldman Sachs in late September at the height of the credit crisis.

He didn't stop there, also getting the right to buy another $5 billion in common stock at what was then the below-market price of $115 a share.

Since then, however, the price of Goldman stocks and bonds have dropped sharply, creating what SmartMoney columnist James B. Stewart calls "a rare opportunity to invest on terms that may be even better than Mr. Buffett got."

In a Wall Street Journal personal finance piece headlined How Investors Can Get In On Buffett's Goldman Play, Stewart points out that some Goldman bonds are now yielding more than 8 percent and have gone as high at 10 percent recently. The interest and principal on those "senior" bonds would get paid out before the Goldman investments made by both Buffett and the U.S. government.

Instead of warrants, Stewart says that for about $10 each you can (at last check) buy options giving you the right to purchase Goldman stock for $105 anytime before January, 2010. "That's the equivalent of the right to buy Goldman shares at $115, which is what Goldman got."

Like Buffett, you'd want to "believe in the future if Goldman" before trying to get Buffett-style terms for your own investment.

While Goldman's stock may never get back to the $250 range of a year ago, Stewart argues "it still has the talent and resources to the the world's pre-eminent investment bank," making it "worth far more than $60 a share, not to mention bonds trading at 80 cents on the dollar."

Source

Buffett's Berkshire Gets A Billion In Beer Bucks

Warren Buffett's Berkshire Hathaway will get almost a billion dollars in cash for its Anheuser-Busch shares, now that the St. Louis brewer's acquisition by Belgium's InBev has been formally completed.

In a news release this morning, the newly renamed Anheuser-Bush InBev notes that under the terms of the $52 billion merger deal, each BUD share has been exchanged for $70 in cash.

Berkshire's third quarter portfolio filing last Friday listed 13,845,000 Anheuser shares as of September 30. That works out to $969,150,000 in new cash for Buffett's company.

It would have been a larger number, if Buffett hadn't sold millions of BUD shares in June. At that point, InBev was offering $65 a share and Anheuser-Busch was aggressively moving to fend off a takeover, making a deal far from a sure thing.

Berkshire reported holding 35.6 million BUD shares at the end of March, worth $2.5 billion at today's deal price. (Of course, Berkshire did get roughly $1.3 billion from the sale of those 22 million shares around $61.)

Source

Warren Buffett's 7 Secrets for Living a Happy and Simple Life

Secret #1:
Happiness comes from within. “In my adult business life I have never had to make a choice of trading between professional and personal. I tap-dance to work, and when I get there it’s tremendous fun.” -- Warren Buffett If you do what you love and love what you do, you’ll naturally be productive.

Secret #2:
Find happiness in simple pleasures. “I have simple pleasures. I play bridge online for 12 hours a week.” -- Warren Buffett You can also learn to be happy with the simple pleasures of playing cards with friends, playing with your children or taking a walk in the wilderness.

Secret #3:
Live a simple life. “I just naturally want to do things that make sense. In my personal life too, I don’t care what other rich people are doing. I don’t want a 405 foot boat just because someone else has a 400 foot boat.” -- Warren Buffett Keeping up with the Joneses is the worst epidemic among those who should never contemplate that notion in the first place. Less is more.

Secret #4:
Think Simply. “I want to be able to explain my mistakes. This means I do only the things I completely understand.” -- Warren BuffettIf you apply this rule in your life, you can develop clarity and sanity in your thoughts. Life is about simple yet profound choices.

Secret #5:
Invest Simply. “The best way to own common stocks is through an index fund.” -- Warren Buffett Often, the simplest route will bring you the most riches, and the most happiness.

Secret #6:
Have a mentor in life. “I was lucky to have the right heroes. Tell me who your heroes are and I’ll tell you how you’ll turn out to be. The qualities of the one you admire are the traits that you, with a little practice, can make your own, and that, if practiced, will become habit-forming.” -- Warren Buffett Having a mentor is as important as having a purpose in your life, but having a wrong mentor is as devastating as having a wrong purpose in your life. The mentor has to be someone you can trust. You’ll find that person in your inner circle if you think hard enough.

Secret #7:
Making money isn’t the backbone of your guiding purpose; making money is the by-product of your guiding purpose. “If you’re doing something you love, you’re more likely to put your all into it, and that generally equates to making money.” -- Warren BuffettMoney should never become the object and end all of your motivation.

Source

How Investors Can Get In On Buffett's Goldman Play

It's not often that the average investor can out-Buffett Warren Buffett. But at the moment, there's a rare opportunity to invest on terms that may be even better than Mr. Buffett got.

Rarely is the playing field level, let alone tilted in the average investor's favor. And there are good reasons why a Warren Buffett gets vastly better terms than either you or me. His investments are seen as instant votes of , which are more valuable than ever in the conconfidencetext of the current financial crisis.

It was front-page news less than two months ago, when Mr. Buffett's Berkshire Hathaway made a big injection of capital -- and confidence -- into Goldman Sachs. The investment bank was in what seemed to be a shocking downward spiral after the failure of Lehman Brothers and the rescue of AIG caused investors to question the solvency of every counterparty, even one as well-capitalized as Goldman.

Mr. Buffett agreed to inject $5 billion into Goldman in return for $5 billion in preferred shares paying a 10% dividend and warrants to buy $5 billion of Goldman common shares at $115 apiece. As a longtime Goldman shareholder, I was slightly resentful at the generous terms, especially given that shares were then trading at $125.

Still, the Buffett play seemed to work its usual magic. Goldman shares stabilized and within days rose to $137. Goldman transformed itself into a bank holding company, the Treasury Department force-fed billions in capital to it and the eight other seemingly healthy giant banks in return for more preferred shares, albeit at much lower interest rates than Mr. Buffett's. (It's yet another measure of Mr. Buffett's stature that he could command much better terms than the U.S. Treasury.)

And then, Goldman shares resumed their descent. They not only reached the Buffett strike price of $115, they sank below it. When Treasury Secretary Henry Paulson said last week that the government would no longer buy the banks' troubled assets, Goldman shares fell to near $61.

Goldman bonds were also caught in the downdraft. The result, according to recent trading data compiled by the Financial Industry Regulatory Authority, is that various issues of senior Goldman bonds, highly rated by both Standard & Poor's and Moody's, are now yielding more than 8%. (Bond yields rise as prices -- and thus, demand -- fall.)

Note that these Goldman bonds are senior to both Mr. Buffett's preferred stock and the government's, which means bond interest and principal gets paid before either Mr. Buffett or the Treasury. Even in the unlikely circumstance that Goldman would be facing default, the U.S. would have a strong incentive to inject more capital into Goldman.

So here's the Buffett alternative available to any investor: You can't get the warrants he got, but you can get something quite similar for far less than $5 billion. When I last checked, Goldman call options with a strike price of $105 expiring in January 2010 were trading for about $10 each. (A call is an option to buy a security at a specific price.) That's the equivalent of the right to buy Goldman shares at $115, which is what Mr. Buffett got.

Instead of preferred stock, you can buy Goldman bonds. A week ago, I bought some at a yield close to 10%. When I last checked the Finra Web site, the best I saw was a little over 8%.

True, this strategy only makes sense if you believe in the future of Goldman. The firm may never return to the glory days when shares were $250 (circa Halloween 2007). But it still has the talent and the resources to be the world's pre-eminent investment bank. That should be worth far more than $60 a share, not to mention bonds trading at 80 cents on the dollar.


Source

Under Buffett?s leadership, Berkshire shares averaged a 21.4% compounded annual gain in per-share book value from 1965-2006.

Profile:
Warren Buffett is the most respected and successful investor in history. Buffett has been called ?The Oracle of Omaha? for his impressive investing prowess. As of September 2007, he was the third richest person in the world. Buffett studied under the legendary Benjamin Graham at Columbia University. Graham had a major impact on Buffett?s life and investment strategies. Buffett is Chairman of the miraculous Berkshire Hathaway, which he built from a textile company into a major corporation with a market cap in excess of $200 billion. Under Buffett?s leadership, Berkshire shares averaged a 21.4% compounded annual gain in per-share book value from 1965-2006.

Investing Philosophy:
Warren Buffett follows a value investing strategy that is an adaptation of Benjamin Graham?s approach. His investment strategy of discipline, patience and value consistently outperforms the market and his moves are followed by thousands of investors worldwide. Buffett seeks to acquire great companies trading at a discount to their intrinsic value, and to hold them for a long time. He will only invest in businesses that he understands, and always insists on a margin of safety. Regarding the types of businesses Berkshire likes to purchase, Buffett stated, ?We want businesses to be one (a) that we can understand; (b) with favorable long-term prospects; (c) operated by honest and competent people; and (d) available at a very attractive price.?


Source

Equity portfolio of Warren Buffett: As on 30 sep 08

As per my research, Warren is holding following shares as on 30 sep 08 (He may be holding more than companies):

1.NRG Energy Inc>>>>>>Electricity>>>>>>>>>>>>>>> 5,000,000 shares
2.Eaton Corp. >>>>>>>>Industrial Goods & serv>>>>> 2,908,700 shares
3. Conoco Phillips >>>>>Oil & Gas Producers >>>>>>>> 83,955,800 shares
4.U.S.Bancorp>>>>>>>>Banks>>>>>>>>>>>>>>>>>>> 72,937,126 shares
5.Comdisco Holding Co. >Industrial Goods & serv>>> >>1,538,377 shares
6.The CocaCola Co>>>>>Food & Beverage>>>>>>>>>>>200,000,000 shares
7.Procter & Gamble >>>>Personal &Household Goods>105,847,000 shares
8.Burlington Northern>>Industrial Goods & Serv>>>>> 63,785,418 shares
9.American Express>>>>Financial services>>>>>>>>>151,610,700 shares
10.Krafts Foods Inc.>>>>Food & Beverage>>>>>>>>>> 138,272,500 shares
11.Johnson & Johnson>>>Pharma & Biotech>>>>>>>>>61,754,448 shares
12.Wesco financial Corp>>Insurance>>>>>>>>>>>>>>>5,703,087 shares
13.Moody's Corp.>>>>>>Industrial Goods & Serv>>>>>48,000,000 shares
14.WalMart stores Inc.>>>Retail>>>>>>>>>>>>>>>>>>19,944,300 shares
15.The Washington post >>Media>>>>>>>>>>>>>>>>>> 1,727,765 shares
16.Anheuser Busch .>>>>>Food & Beverage>>>>>>>>>>13,845,000 shares
17.Union Pacific Corp>>>>Industrial Goods & Serv>>>> 8,906,000 shares
18.M&T Bank Corp.>>>>>>Bank>>>>>>>>>>>>>>>>>>>6,715,060 shares
19.NIKE Inc.>>>>>>>>>>Personal &Household Goods>7,641,000 shares
20.USG Corp.>>>>>>>>>Construction & Materials>>>>17,072,192 shares
21.Costco Wholesale >>>>Retail>>>>>>>>>>>>>>>>>>> 5,254,000 shares
22. Comcast Corp. l>>>>> Media>>>>>>>>>>>>>>>>>>>12,000,000 shares
23.General Electric Co>>>Industrial Goods & Serv>>>>>7,777,900 shares
24.Ingersoll Land Co >>>Industrial Goods & Serv>>>>>>5,636,600 shares
25.Torchmark Corp.>>>>Insurance>>>>>>>>>>>>>>>>2,823,879 shares
26.SunTrust banks inc.>>>Bank>>>>>>>>>>>>>>>>>>>>3,204,600 shares
27.Sanofi Aventis>>>>>> Pharma & Biotech>>>>>>>>>> 3,903,933 shares
28.Norfork Southern >>> Industrial Goods & Serv>>>>>>1,933,000 shares
29. WABCO Holdings >>> Automobiles & Parts>>>>>>>>>2,700,000 shares
30.United parcel serv>>>Industrial Goods & serv>>>>>>>1,429,200 shares
31.Iron Mountain Inc.>>>Industrial Goods & serv>>>>>> 3,372,200 shares
32.GlaxoSmith Kline >>>>Pharma & Biotech>>>>>>>>>> 1,510,500 shares
33.Gannett Co Inc>>>>>>Media>>>>>>>>>>>>>>>>>>> 3,447,600 shares
34.Wells Fargo & Co>>>>>Bank>>>>>>>>>>>>>>>>>>>>290,407,668 shares
35.UnitedHealth Group >>Health care Eqpt & servi>>>>>6,379,900 shares
36.WellPoint Inc>>>>>>>Health care Eqpt & serv>>>>>>4,777,300 shares
37.Lowe's companies >>>Retail>>>>>>>>>>>>>>>>>>>>6,500,000shares
38.The Home Depot >>>>Retail>>>>>>>>>>>>>>>>>>>>3,700,000 shares
39.CarMax Inc>>>>>>>>Retail>>>>>>>>>>>>>>>>>>>>18,444,100 shares
40.Bank Of America >>>>Bank>>>>>>>>>>>>>>>>>>>>>5,000,000 shares


Disclaimer: To the best of my knowledge, the information given above is correct. Investors may be required to do their own research or seek professional advice from their brokers before investing into these stocks.

Warren Buffet's NYT Article on 16 Oct 08

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.
Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Source

Berkshire Hathaway Shares Close Below $100,000 For First Time In Two Years

Shares of Warren Buffett's Berkshire Hathaway closed below $100,000 today (Monday) for the first time in just over two years. The most recent sub-$100K close before today was on October 20, 2006.

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Today's finish at $95,615 is a fresh two-year closing low. The stock fell $5,385 today, a drop of 5.3 percent. That's the biggest one-day point and percentage decline in three weeks, and the fourth biggest percentage drop of the year.
While Berkshire's Class A stock had traded in five-digit territory on Thursday and Friday, it recovered both days to close above $100K.

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Berkshire shares are down almost 36 percent from their December 10, 2007 all-time closing high of $149,200. They were in the high $130s as recently as early October.Berkshire has dropped 32.5 percent year-to-date, outperforming the benchmark S&P 500's 42.1 percent decline.

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Three of the four "bombs in Buffett's books", as designated earlier this year by short-seller Doug Kass, are outperforming both Berkshire and the S&P this year.

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Coca-Cola is down 28.4 percent, Wells Fargo has dropped 7.8 percent, and Kraft Foods is off 19.4 percent.
American Express, however, is down 62.8 percent year-to-date. A piece in Barron's over the weekend argued that the company is in better shape than its stock price, and speculated that Buffett could come to its rescue if things get really bad.

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10 Great Rules to become Rich

An old saying goes, “You can’t build wealth by buying things you don’t need, with money you don’t have, to impress people you don’t like.” So how do you build wealth? Read on…

There are basically only four roads to wealth:

You can marry it (don’t laugh, some do);
You can inherit it (others do that);
You can get a windfall (from a lawsuit settlement, lottery, or some other unexpected good fortune); or
You can accumulate it.

Most of us are stuck with option #4 - accumulate it. To do so, you need to understand how to manage cash flow. First, look at your annual earnings and multiply that figure by your working years. Not counting inflation (that is, pay raises along the way), the result may total several million dollars.

Whether you will have that several million dollars by retirement, though, depends on how you manage your cash flow - and how you answer the following questions: What do you need now, what do you want now, and what can you save and invest for the future?

Here are ten time-tested rules that can weather the stormiest market cycles.

Rules #1: Live within your means

This includes managing debt and learning to budget. Such boring topics may not be the most exciting things about becoming wealthy, but they may be the most critical.

Consumer-driven economies relentlessly hammer away at why we must buy this item or that gadget so we can have the appearance of being successful, happy, and altogether “with it.” So it takes financial discipline and sensible behavior to successfully accumulate money and grow wealthy.

Possibly the biggest trap out there is easy credit, which lets us buy numerous things we might not need. Comedians have pointed out the foolishness: “You buy something that’s 10 per cent off and charge it on a 20 per cent interest credit card!” And US newspaper columnist Earl Wilson opined, “Nowadays there are three classes of people - the Haves, the Have-Nots, and the Have-Not-Paid-For-What-They-Haves.”

Learning to live within your means leads to a freer life - debt can be a mean master instead of a worthy servant. Save first, spend second. If you do so, building wealth will be a lot easier for you.

Rule #2: Save aggressively

This does not mean “invest aggressively.” Rather, it means making it an absolute priority to set aside 10 per cent of your income right off the top, and even more if your goals tell you to do that. The longer you wait to start saving, the larger the percentage of your current pay you will have to save to reach your goal.

If you can save aggressively, you will be surprised how that “nest egg” will start to compound. Look at any chart of compounding. It has been said that it’s the last compounding that makes you wealthy.

In other words, $20,000 becoming $40,000 doesn’t seem like a lot of headway, but when the $40,000 compounds to $80,000, and the $80,000 to $160,000, and finally the $160,000 to $320,000, we’re now talking about some serious money. Two more “doublings” and this account will be worth over $1.2 million. Those who spend first and save later inevitably end up working for those who have learned to save first, spend second.

Rule #3: Dollar-cost average

When buying shares, remove emotions from your investing by automatically buying more shares or equity mutual fund units when they are cheap. Emotional investing gets too many people in trouble. Statistics continue to show that we tend to buy when things are going up and sell when they are going down - in other words, we tend to buy high and sell low. Dollar-cost averaging not only removes emotions from investing, but it helps you buy low. Here’s how:

By putting a constant amount into the market, as the price slips, you buy more and more number of cheaper shares or fund units and thereby reduce your average cost.

For example, let’s say you are investing $100 a month into a fund. In the first month, the price of the fund is $10 per share and you buy 10 shares. The next month, the price has dropped to $8 per share, so your $100 buys you 12.5 shares. The next month, the price has fallen again, to $5 a share, and you buy 20 shares. In the fourth month, the price ticks back up to $7 per share. Your total investment so far is $400.

If you’re like most people, though, when you look at your statement and see that by the end of the third month the price has fallen to half, you would probably think you were losing money hand over fist. Especially after a fund continues to decline month after month, investors lose patience and start to bail. They’re looking for “better returns,” but they don’t understand what’s going on with the math.

At $5 a share, it feels as though you’re down 50 per cent (because the price started at $10 per share). However, you own 42.5 shares, which, when multiplied by $5 a share, equals $212.50 - and you’ve invested $300. In the fourth month, the price gets back up to $7 per share. Although it might feel as though you’re still down because the price started at $10 per share, you’re actually within a couple of dollars of your break-even point. You own 56.79 shares, which when multiplied by $7 equals $397.53, on an investment of $400.

Of course, if the fund or market continues to go down and never comes back up, you can’t be guaranteed a profit. But this would happen rarely, if ever. Dollar-cost averaging - by investing a fixed amount in regular intervals - is the best way to make money in a variable market over time.

The most difficult part is having the discipline to keep doing it. Investors should be willing to consider their ability to invest over an extended period of time. Remember, you need a longer time horizon when investing in the stock market.

Rule #4: Diversify

No investment is risk free; only a diversified portfolio can mitigate the risks of market cycles. We’ve all been warned against putting all our eggs in one basket; even Warren Buffett said, “It’s better to be approximately right than definitely wrong.” By “approximately right,” he was referring to diversification.

If one piece of your portfolio is doing substantially better than other parts, the natural inclination is to load up on the part doing the best and forsake those not doing well. But the result will be an under-diversified portfolio that will probably be much more volatile - and the risks may be on the downward side.

Also, proper diversification does not mean any old bunch of mutual funds or stocks, but a proper allocation among stocks, bonds, real estate, fixed assets, and other investments. It also means diversifying within those investment categories.

For example, your stocks should include a mix of mid cap, large-, and small-cap stocks as well as growth, blend, and value stocks. You should have bonds that are long, medium, and short term, as well as high grade, mid grade, and low grade.

A mutual fund may offer more diversification than you could afford by owning the same stocks individually. But owning a handful of mutual funds may not offer the diversification you seek unless you research the funds’ holdings carefully. That’s because many funds have substantial “overlap.” In other words, fund A from mutual fund family X may have many of the same stocks as fund B from fund family Y.

Rule #5: Be patient

Warren Buffet says, “The market has a very efficient way of transferring wealth from the impatient to the patient.”

But waiting is very hard to do. How long are you willing to hold an asset that is not performing well? One year? Two, three, or four? If you look at the history of asset classes over time, you will see that an asset can be “out of favor” for several years in a row.

You have to be prepared to wait. Don’t think you can time when bonds will perform and stocks will get hot. If someone really could do that, he would own the world by now. So remember: Time in the market is more important than timing the market.

Rule #6: Understand volatility

Very few people truly understand the risk and volatility inevitably baked into every investment portfolio. Without getting into its complexity, every variable investment has produced a range of returns over its lifetime, and this range, or deviation, can be plotted on a chart.

So, it’s important to understand what the investment category’s “average” annual return means in order to prepare yourself for its volatility. For example, does a 10 per cent average mean the investment was up 73 per cent and down 30 per cent and happened to average 10 per cent? Or was it up 15 per cent, and then down 5 per cent to average 10 per cent?

Many investors are fooled by averages - they chase the 70 per cent return after it has happened, when the likelihood of a repeat performance is slim (which we’ll discuss more in Rule #7). Yogi Berra is rumored to have said, “Averages don’t mean nuthin”. If they did, you could have one foot in the oven and the other in a bucket of ice and feel perfectly comfortable.”

Over time, returns from investments regress to a mean. “Regression to the mean” simply means that highs and lows will average out so that your return regresses to a certain number or range. Understand an investment’s range of returns so you know what to expect annually, and over time.

Markets move from fear to greed, and back to fear. So there are times when the market is “overvalued” and other times when it is “undervalued.” Warren Buffett said of the stock buying and selling decisions made at his company, Berkshire Hathaway, “We strive to be fearful when others are greedy, and greedy only when others are fearful.”

Rule #7: Don’t chase returns

If we know from Rule #6 that a 10 per cent average annual return does not really mean a 10 per cent return each year, why do we still fall for an ad touting a fund that produces 20 per cent annually or some other phenomenal return?

Human nature. And maybe we even convince ourselves that for the chance to experience a year or two of 70 per cent gains, we’re willing to stomach the years of 30 per cent losses that also fall within the fund’s range of returns.

So, before chasing that incredible return, find out how the investment did during the last bad market for that asset class. Find out its risk, and ask yourself whether you can stomach a bumpy ride over the long term.

Another Buffettism: “The dumbest reason in the world to buy a stock is because it is going up.” So before chasing a return, always consider how likely it is that the investment will continue to produce that return - and whether it’s really worth the cost of cashing out of another, perhaps only temporarily depressed, investment to do so.

Rule #8: Periodically rebalance your portfolio

You may decide that your investment mix should be, for example, 50 per cent growth stocks, 20 per cent value stocks, and 30 per cent bonds. But asset classes vary in performance over time, so after a year or so, the portfolio balance will start to shift as one asset “overperforms” and another one “under performs.”

Emotions would tell you to sell the under performers and buy the overachievers. If you want to remain adequately diversified, however, you would re balance by selling some of the over performers and buying some of the underachievers - probably just the opposite of what your emotions will tell you.

So, if you strive to put your portfolio back to its original allocations from time to time (annually, semi-annually, or possibly even quarterly), you will be taking gains from the best-performing assets (selling high) and buying those temporarily out of favor (buying low). But it takes discipline to keep your emotions in check.

Rule #9: Manage your taxes

Have you ever considered how taxes are your biggest expense in life - more than mortgage expense, education expense, or any other expense? So, you must take advantage of all tax breaks available - each and every single one of them.

Rule #10: Get advice

Never underestimate the value of good advice. Someone who manages investments full time certainly will find things you have overlooked or done wrong. A good financial adviser is like a personal trainer for your finances and can get you on track and keep you there until your goals are met.

And even more critical than getting the advice is being sure you consistently follow your game plan. The greatest problem for most people is procrastination and erratic investment behavior. So get started, get advice, and get going down the road to wealth - and steadfastly follow through.

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Warren Buffett’s 10 ways to get Rich

1. Reinvest your profits - this is the only way to take advantage of compound growth, which is money growing on money.

2. Be willing to be different - you follow the herd, you’re gonna get hurt. Going against the herd may be scary, but can pay off if done properly.

3. Never suck your thumb - If you find something good, act. Don’t sit around doing nothing.

4. Spell out the deal before you start - Get all the details in writing before you follow through.

5. Watch small expenses - The article mentions a guy who counted 500-sheet rolls of toilet paper to make sure he wasn’t being ripped off. That seems a bit extreme to me but I see the point of not wasting money.

6. Limit what you borrow - I believe that the only acceptable forms of debt are student loans, car loans (reasonable car loans), mortgages, and possible 0% deals that may pop up every once in a while. Now, don’t mistake that sentence to mean that I think it’s okay to have debt—that’s not what I’m saying. The main thing is to use debt as a tool and use it wisely.

7. Be persistent - Always remember the saying: “If at first you don’t succeed, try, try again.”

8. Know when to quit - You have to know when to say, “when.”

9. Assess the risks - Do some worst-case-scenario analysis before you proceed. In other words, count the costs before you begin.

10. Know what success really means - I love the fact that Buffett is not on an ego trip with his giving. According to the article, Buffett does not want any buildings named after him. That’s soooooo cool! I really respect that about him.

Warren Buffett Echoes His 1974 Advice: Buy Stocks

Ever since Warren Buffett penned his New York Times op-ed piece Buy American. I Am. last month, investors everywhere from blogs to Barron’s have been questioning the soundness of his advice to purchase stocks. Mr. Buffett stated, ”A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” He also warned us that trying to time the markets was dangerous, since it means we might miss a market recovery:

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

Remarkably, Mr. Buffett’s exhortation to buy stocks today echoes the prescient advice he gave back in 1974 in a Forbes profile of him entitled “Look At All Those Beautiful, Scantily Clad Girls Out There!”

Economic uncertainty was arguably worse in 1973-’74 than today. Our rivers and lakes were polluted; people were worried about natural-resource scarcity; the U.S. was bogged down in Vietnam; Watergate broke and Nixon resigned; and the Organization of Arab Petroleum Exporting Countries (OPEC) organized an oil embargo against the U.S. for supporting Israel during the Yom Kippur war. From January 1973 to December 1974, the S&P 500 Index declined from peak to trough a whopping 48%. All of which led people to conclude that the so-called American Century had come to a premature and undignified end.

It was in this 1974 environment that Mr. Buffett told Forbes,”Now is the time to invest and get rich.” He stated:

You can’t invest in the anticipation of calamity; gold coins and art collections can’t protect you against Doomsday. If the world really is burning up, “you might as well be like Nero and say, ‘It’s only burning on the south side."

“Look, I can’t construct a disaster-proof portfolio. But if you’re only worried about corporate profits, panic or depression, these things don’t bother me at these prices.”

As it turned out, 1975 was one of the best years ever for the U.S. stock market, and seven years later began the longest bull market the world has ever seen.

Today, we don’t know whether the coming months will be 1974, 1975, or something altogether different. But with the S&P 500 Index down 44% from its all-time high of 1,565 on Oct. 9, 2007, and with Mr. Buffett telling us once again that we should consider purchasing stocks, it might behoove us to listen. After all, the Sage of Omaha also warned us back in 1999 about tech stocks and the so-called New Economy.

Here’s what Mr. Buffett is telling us right now:

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

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Warren Buffett

We all have someone whom we admire and respect. For me one person on my shortlist is Warren Buffett who is sometimes referred to as the “Sage of Omaha“. I first heard about Buffett back in 2001 when I first started getting serious about investing and so I started reading all the titles with his name on it. Off course Buffett hasn’t actually written any of them but they were priceless none the less.

If you have never heard of Buffett, Forbes currently ranks him as the third richest man in the world and he is arguably the world’s greatest investor. He has amassed his fortune by making astute investment decisions and investing in businesses. Here is what I have learnt from Buffett:

1. Rich Is A State Of Mind
“I always knew I was going to be rich. I don’t think I ever doubted it for a minute.” - Warren BuffettThe difference between being poor and being rich is really just a state of mind. Poor people think thoughts of poverty and lack, rich people think thoughts of abundance and prosperity. Your beliefs are going to determine the way you perceive wealth, the decisions you make and the way you act towards it.

2. Success Is More Than About Your Bank Balance
When asked by CNBC what is the secret to success, Buffett replied “If people get to my age and they have the people love them that they want to have love them, they’re successful. It doesn’t make any difference if they’ve got a thousand dollars in the bank or a billion dollars in the bank… Success is really doing what you love and doing it well. It’s as simple as that. I’ve never met anyone doing that who doesn’t feel like a success. And I’ve met plenty of people who have not achieved that and whose lives are miserable.”

3. Spend Less Than You Earn
“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” -Warren Buffett

It seems like common sense advice and you’ve no doubt heard financial experts preaching about it for years. You can’t possibly get ahead financially if you’re spending more than your paycheck. Buffett is famous for living a simple and frugal lifestyle. He is the only billionaire I know that still lives in the same house he bought back in 1958 for $31,500. He drove a 2001 Lincoln Town Car for years which he bought second hand. Buffett has a net worth in excess of $52 billion and yet lives off an annual salary of $100,000. The relative percentage of his spending based on his overall net worth is minuscule.

4. Avoid Consumer Debt
The sooner we realize that consumerism is a social plague that has been propagated by billion dollar marketing machines to keep you shackled to your job, the sooner we can stop spending money on useless stuff. It is a fool’s game to spend today so that you can work tomorrow to pay it off. It is a losing proposition because one day your working days are going to be over but the debt is still going to be hanging over your head. Clever marketing has convinced our society that to be happy you have to have more, be more and do more. Buffett abhors consumer debt instead choosing to use debt wisely by leveraging it in investments. To help you deal with your debt consider reading “How To Get Yourself Out Of Debt“.

5. You Are Who You Associate With
“It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.” -Warren Buffett

If you want to succeed financially you need to associate with people who are most conducive to encouraging and cheering on your financial journey. If the people you associate with see money as evil, object to capitalism and find wealth a foreign concept then your financial health and well being is going to be influenced by their views. Whether we like it or not we are all influenced to some extent by the people we spend our primary time with. If you aspire to achieve financial security then you need to find a mastermind of people in your life whom you can all encourage and help each other.

6. Gambling Is A Fools Game
“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” - Warren Buffett

While we are young and naive we choose to take risks with our money that are dumb and stupid. Trying to hit a home run with your money every time is a losing proposition with long term consequences. To chase investments that offer a high rate of return you must also assume that it also comes with a higher rate of risk. Bill Gates once quipped “Warren’s and my betting has always been confined to $1 bets” when talking about them paying poker together. If two billionaires take risk management this seriously, it’s time we average punters did the same thing.

7. Give Back To The Community
“Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.” - Warren Buffett

They say that to have more you need to give more. A contradiction in terms, maybe, but it’s a simple truth that is as enduring as time. As the bible says “It is more blessed to give than to receive -Acts 20:35”. Buffett has announced in 2006 that he was giving away over $30 billion to the Bill and Melinda Gates Foundation making it at the time of writing the largest charitable donation in history. He also contributes large sums to his children’s charitable foundations.

8. Generosity and Abundance Goes Hand In Hand
“Even though Ben Graham [Buffett's mentor] had everything he needed in life, he still wanted to give something back by teaching, So just as we got it from somebody else, we don’t want it to stop with us. We want to pass it along too.” - Warren Buffett

A famous bible quote goes: “What benefit will it be to you if you gain the whole world but lose your own soul?” - Mark 8:36. The path to wealth isn’t a solo endeavor. How sad would life be if you come to the end of your life and there is no one to share it with. So as you journey on your path to financial abundance remember that there will be many people who generously helped you on your journey so it is only fitting to pay it forward when the opportunity arises. Generosity with your time, with your money, with your resources are great virtues to have. The greatest ally to building a strong friendship is to help others achieve what they want from life.

I leave you with this last quote “You only have to do a very few things right in your life so long as you don’t do too many things wrong.” - Warren Buffett


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Warren Buffett’s Value Investing Style

Warren Buffett is the world famous stock marketguru. Recently, he bought stakes of General Electric Co (GE) and Goldman Sachs Group. General Electric Co (GE) is a technology and services giant company which is listed in Dow Jones board; whereas, Goldman Sachs Group (GS) is a financial heavyweight company, which is listed in New York Security Exchange (NYSE). Through his famous investment company; Bershire Hathaway, Buffett invested US$8bil in these two companies. His action startled many people in stock market. When everybody was taking their money out from the Wall Street, he invested such a huge amount of money. There is no surprise actually because he at one time said that the best time to enter the market was when everybody was not interested in stocks. He also stated that it was difficult to buy a popular stocks and made profit from it. Besides, he also said that when everybody was in fear was the best time to enter the market but not when everybody was greedy. According to financial specialists, Buffett investment is a long term investment.

Currently, stock prices are considered as irrational due to the heavy sell down. So, now it is the best time to invest. When investing in a company, we should invest to the company management and market strategy. In this type of investment, good stocks should be held as long as possible by the investors.

When investing in stock market, Warren Buffett is very careful. He sets very strict requirements to select stocks. So, stocks that fulfill his requirements are seldom being found. Earnings versus growth, high return on equity, minimal debts, strength of management and simple business model are five main criteria, which are used by Buffett to select stocks to invest. He usually concentrates in a few solid stocks, which able to give high return of investment. These few stocks usually are in the industries that he understands the most. He is also very careful to the local bourse, which is an emerging market that could be very volatile. Besides, he is also watchful to the market sentiment, which could be easily affected by many other external factors.

Good stocks are worth to hold for as long as possible. This is because good stocks such as blue chip stocks are able to ride through bad times and recover over time. Buffett is the most successful and trusted investors. His investments in GE and Goldman Sachs will restore the confidence of some of the investor on the Wall Street. When Buffett invests in stocks, underlying fundamentals of a company are the must will be investigated by him rather than market sentiment. Because of his astute investment skill, he is dubbed as “The Oracle of Omaha”. Intrinsic value of a business is always will be determined by him and he is willing to pay a good price for it as long as the business has the intrinsic value. Buffett is very prudent and holds a principle that if he can not understand the operation of the business; he will not invest in it. That’s why, he escaped the dotcom market crash. He will check the fundamentals of the companies that he intends to invest by analyzing the companies’ annual reports. This is his simple investment principle.

He is the chairman of Berkshire Hathaway and this company’s stock is the most expensive on Wall Street. In a letter last year to his shareholders, he stated that Bershire was looking to invest to the companies, which had competitive advantage in a stable industry for long-term prospects. His philosophy is that the stock price will increase as long as the business does well. Investment in PetroChina, which is an oil and gas firm in China, was one of his most successful investments. He bought the stake for this company for an initial sum of US$500 mil and then sold it for US$3.5 bil. Investments in companies such as Coca-Cola, American Express and Gillette are also among his successful investments.


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Is it the Right Time to Buy the US Stocks?

EVERY time the market suffers another steep drop, it’s tempting to think that stock prices may have come down so much that the elusive market bottom is finally in sight.

Prices have certainly come down. On Friday, the Standard & Poor’s 500-stock index was 44 percent below its peak of a little more than a year ago. Since then, the price/earnings ratio on the S.& P. has dropped from 16.8 all the way down to 12. With numbers this low, is the sell-off nearing an end?

It’s certainly possible, and some canny investors have begun nibbling at stocks. But don’t count on being able to time the market.

While cheap stock prices are always a welcome development for bargain-seeking investors, low P/E ratios haven’t always been an accurate gauge of predicting turnarounds in the market.

If they were, stocks would have surged sharply in the mid to late ’70s, when the market’s P/E ratio sank into single digits. Instead, the S.& P. was pretty much flat throughout that time.

“Cheap valuations are simply a symptom of what’s wrong, not the catalyst to get the market out,” said Richard Bernstein, chief investment strategist at Merrill Lynch. After all, just because stocks are trading at extremely low levels today, it doesn’t mean they can’t become even cheaper tomorrow.

To be sure, investors may be hopeful now that some respected investors — including Warren E. Buffett, chief executive of Berkshire Hathaway, and Jeremy Grantham, a chairman of the investment management firm GMO — say they’ve begun to selectively buy stocks.

But both have gone to painstaking lengths to stress that they weren’t predicting that the worst of the sell-off was over.

In an Op-Ed article in The New York Times, Mr. Buffett wrote: “I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now.”

Similarly, Mr. Grantham said in an interview that even though his firm began buying stocks in early October, after prices fell to attractive levels, the market had a tendency to “overshoot” during sell-offs. “Market bottoms have this Murphy’s Law style of being much lower than you ever expected in your worst nightmare,” he said.

Mr. Grantham adds that he thinks the odds are roughly two to one that stock prices will sink to new lows next year. If the economy is in a modest recession, Mr. Grantham thinks the S.& P. could fall from its current level of around 870 down to 800. But if the recession turns out to be a severe one, “the S.& P. could fall to a range that’s closer to 600 than 800,” he said.

If that’s the case, why did GMO begin to buy stocks in this market? Because Mr. Grantham doesn’t believe in trying to time short-term market moves.

Mr. Grantham noted that GMO began buying only after its portfolios had fallen below some key thresholds. For example, in GMO’s global balanced portfolio of stocks and bonds, the firm’s minimum allocation to equities is usually 45 percent. But after the market sell-off, that equity allocation dipped to around 38 percent. So once stock prices began to look attractive, GMO started rebalancing back into what it regards as the most undervalued types of equities: emerging markets stocks and high-quality domestic blue chip shares. After a few rounds of purchases, stocks now make up around 55 percent of GMO’s global balanced portfolio.

Mr. Grantham says that although he doesn’t know how well he timed his purchases, “we do know that seven years out, these will be good purchases for us.”

But what if you are determined to be opportunistic? How can you tell if the market is poised to rebound anytime soon — or at least sooner than seven years?

There is no sure-fire answer. But one way is to pay close attention to the asset allocation recommendations of Wall Street strategists. “It turns out to be a tremendous contrarian signal” for spotting market trends, said Mr. Bernstein.

For more than two decades, Mr. Bernstein has tracked recommended equity allocations in balanced portfolios managed by Wall Street firms. He found that when the consensus recommendation for stocks exceeds 60 to 65 percent of a balanced portfolio — as was the case between 2000 and 2004 — it tends to be a bearish indicator for future stock performance. On the other hand, when market strategists recommend keeping only around half of your portfolio in stocks, as was the case in 1997, it tends to be a bullish sign.

In addition to investor sentiment, it’s also worth keeping tabs on the sentiment of another group of Wall Street pros: the analysts who follow individual companies.

In recent weeks, these analysts have begun to lower their forecasts for 2009 earnings. Mr. Bernstein notes that for the first time in seven years, the ratio of upward earnings revisions to downward revisions has fallen to 0.5 — meaning that for every corporate earnings forecast that has grown more positive, two have become more pessimistic. “Analysts may be finally appreciating that the financial crisis has turned into a full-blown economic crisis,” he said.

Still, analysts are far from throwing in the towel on their earnings forecasts, which may be needed for the market to start to rally.

While profit projections have declined, they may still be way too bullish. According to a survey of analysts by Thomson Financial, earnings growth estimates for S.& P. 500 companies in 2009 have fallen well below the rosy 22 percent forecast at the start of October. Still, they’re expecting corporate profits to grow more than 12 percent next year. Since many are predicting a difficult first half of the year, thanks to the weakening economy, this would assume a tremendous profit surge in the latter half of 2009.

Christopher N. Orndorff, head of equity strategy at Payden & Rygel, an asset manager based in Los Angeles, predicts that “the earnings releases in January are going to be poor.” That should drive down earnings forecasts for 2009 even lower, he said.

If earnings forecasts begin to fall substantially, he said, “it will be very difficult for stocks to rally.”

By PAUL J. LIM

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Will Warren Buffett Rescue American Express? (AXP)

Barrons had an interesting piece on American Express (AXP) today, suggesting Warren Buffett may come to the aid of the credit card company.

Warren Buffett and American Express have a long relationship and a deep one as well, with Buffett’s Berkshire Hathaway owning about 13% of the company already. The thought is that Mr. Buffett may be willing to invest more dollars into the company or potentially use stock to acquire the company outright. That would not be the norm, as Berkshire Hathaway prefers using cash in its transactions.

We have been following the follies of American Express, and have continued to warn investors that the company made some badly-timed decisions that has put the franchise in a tough position. Management’s timing to expand the credit card portfolio in 2004 put the wheels in motion on the huge credit card losses the company is now dealing with.

The Bottom LineMr. Buffett will likely demand terms similar to his Goldman Sachs (GS) deal, but that is if he feels the bet should be made. With all the deteriorating financials out there, and Berkshire themselves coming off a disappointing quarter, the timing of any American Express deal may be far off and perhaps unlikely. One thing we do know is that there are no signs that the company will be turning around anytime soon, so investors may need to put this name on the shelf until the spending slowdown and the credit card loan defaults trends improve. The company has a dividend yield of 3.60%, based on Friday’s closing stock price of $19.99.


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Memo to Warren: AmEx Preferred at 15%, Warrants at $12

Barron's is suggesting that Warren Buffett might come to the rescue of American Express (AXP). Since Berkshire Hathaway (BRK.A) already owns 13% of the troubled credit card issuer, a rescue might make sense. If, that is, Mr. Buffett can price his entry in line with the new reality governing yields and valuations.

On Monday, Fed officials announced that an application to transform American Express into a bank holding company had been approved. Two days later, the company confirmed that it was seeking $3.8 billion in government aid. But that is only part of the story. Besides needing $4 billion from the commercial paper market, American Express must raise nearly $7 billion in longer-dated debt within six months, and another $15 billion within the next year. Quite clearly, Chief Executive Ken Chenault’s strategic decision to rapidly expand the domestic credit card portfolio from $38 billion, in 2004, to $70 billion failed to incorporate the prospects of a serious economic downturn.

American Express shares are down 60%-plus so far this year. So the challenge facing Warren Buffett, or any other investor with deep pockets, is to determine whether (a) the inevitable increase in credit card delinquency rates, domestically and globally, has been factored in at current price levels and (b) the 10% yield on Goldman Sachs (GS) and General Electric (GE) preferred stock investments adequately reflects the reality in this instance, on a company-specific and comparative basis, of today’s fluid bond pricing environment.

If American Express and Berkshire Hathaway longer-dated CDS spread trends are any guide, Mr. Buffett should provide around 850 basis points for default risk alone. Then, given the nature of the yield curve, a more prudent fixed rate benchmark is about 5%. After adding execution costs, a rationally priced preferred should yield 15%.

Of course, as Barron's pointed out, the 5% preferred-with-warrants proposition from the Treasury appears, at first glance, to be a decidedly better alternative for American Express, particularly when the credit card company could also access the FDIC guarantee programme for near-term and medium-term debt issues. But the finer print of the FDIC’s Interim Rule has received serious objections relating to fees, maturity restrictions, guarantee quality and even capital adequacy guidelines. When, if and at what cost the FDIC programme begins is still an open question. In the interim, there is certainly room for Berkshire Hathaway to increase its stake in American Express.

Which brings us to the task of establishing a strike price for the warrants. When Moody’s cut its rating on American Express last month, from “A2” from “A1”, it placed the company on negative watch. And for good reason. Moody’s statement warned that since American Express derived much of its income from fees, as opposed to interest from revolving credit balances though “its lending exposures have increased significantly over time.” Note the important shift in key value drivers.

The statement went to on to point out that “with this shift, eroding economic conditions across the US will likely pose a higher burden on Amex’s asset quality and profitability. In its latest disclosure documents, Citigroup (C) conceded that it is virtually impossible, at this point in time, to assess how the fate of the global economy will influence the quantum of credit card default provisions required during 2009. Note the uncertainty.

This writer’s bearishness on American Express shares (Friday close: $19.90) is firmly rooted in the belief that unless Washington can resolve the crisis in jobs (including job quality) and housing on a high-priority basis, consumer delinquencies must rise exponentially in forthcoming weeks and months. Believe the optimists, who invariably talk of 5-year and 10-year time horizons, if you must. For the record, if this is any comfort to AXP bulls, Barron's is of the view that the market is presently over-reacting, and that American Express has ample liquidity to ride out whatever tough economic conditions lie ahead.


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Warren Buffett: Why I’m Buying U.S. Stocks Now

Warren Buffett wants the world to know that it’s time to get greedy right now, as fear sends stock prices plunging across the globe.

Using the widely-read opinion pages of The New York Times, Buffett writes that he’s been buying U.S. stocks for his personal account, picking up a “slice of America’s future at a marked-down price.”

READ WARREN BUFFETT’S NEW YORK TIMES OPINION PIECE

Besides his Berkshire Hathaway shares, Buffett reveals that he used to own nothing but U.S. bonds. Now, he writes, “If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent” in American stocks. (Remember, he’s talking about his own holdings, not the billions of dollars of stock owned by Berkshire Hathaway itself.)

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”


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So How Does Warren Buffett Find Low-Priced Value?

Here we look at some of the questions that Buffett asks himself when he evaluates the relationship between a stock's level of excellence and its price. Keep in mind that these are not the only things that he analyzes:

1. Has the company consistently performed well?

Sometimes ROE is referred to as "stockholder's return on investment." It tells the rate at which shareholders are earning income on their shares. Warren Buffet always looks at the return on equity (ROE) to see whether or not a company has consistently performed well in comparison to other companies within the same industry. ROE is calculated as follows:


= Net Income
Shareholder's Equity

Just having a high ROE last year isn't enough. The investor should view the ROE from the past five to ten years to get a good idea of the historical growth.

2. Has the company avoided excess debt?

The debt/equity ratio is another key characteristic that Warren Buffett carefully considers. Buffett prefers to see a very small amount of debt, which means earnings growth is being generated from shareholders' equity. The debt/equity ratio is calculated as follows:

=Total Liabilities
Shareholders' Equity

This ratio indicates the proportion of equity and debt the company is using to finance its assets, and the higher the ratio, the more debt--rather than equity--is financing the company. A high level of debt compared to equity can result in volatile earnings and large interest expenses. For a more stringent test, investors sometimes use only long-term debt instead of total liabilities.

3. Are profit margins high? Are they increasing?

The profitability of a company depends not only on having a good profit margin but also on consistently increasing this profit margin. This margin is calculated by dividing net income by net sales. To get a good indication of historical profit margins, investors should look back at least five years. A high profit margin indicates that the company is executing its business well, but increasing margins means that management has been extremely efficient and successful at controlling expenses.

4. How long has the company been public?

Buffett typically considers only companies that have been around for at least ten years. As a result most of the technology companies that have had their IPOs in the past decade wouldn't get on Mr. Buffett's radar. It makes sense that one of Buffet's criteria is longevity: value investing means looking at companies that have stood the test of time but are currently undervalued. Never underestimate the value of historical performance, which demonstrates the company's ability (or inability) to increase shareholder earnings. Do keep in mind, however, that the past performance of a stock does not guarantee future performance--the job of the value investor is to determine how well we can trust that the company has a capacity to perform as well as it did in the past.

5. Do the company's products rely on a commodity?

Initially you might think of this as a radical approach to narrowing down a company, but Buffett tends to shy away (but not always) from companies whose products are indistinguishable from competitors, and those that rely solely on a commodity such as oil and gas. He does not put his money into companies that rely on the price of an underlying commodity. If the company does not offer anything different than another firm within the same industry, be wary as a value investor.


6. Is the stock selling at a 25 percent discount to its real value?

6. Is the stock selling at a 25 percent discount to its real value?

This is the kicker. Finding companies that meet the other five criteria is one thing, but determining whether they are undervalued is the key for value investing, and finding a company that is trading at a 25 percent discount is not always easy. To check this, we must determine the intrinsic value of a company by analyzing a number of business fundamentals, including earnings, revenues, and assets. A company's intrinsic value is usually higher than its liquidation value, which is what a company would be worth if it were broken up and sold today--the liquidation value doesn't include intangibles such as the value of a brand name, which is not directly stated on the financial statements.

Once Buffett determines this intrinsic value of the company as a whole, he compares it to its current market capitalization, which is the current total worth (price) of the entire company. If his measurement of intrinsic value is at least 25 percent higher than the company's market capitalization, Warren Buffet sees the company as one that has value. Sounds easy, doesn't it? Well, Buffett's success, however, depends on his unmatched skill in accurately determining this intrinsic value. While we can outline some of his criteria, we certainly have no way of knowing exactly how he gained such precise mastery over calculating value.

Conclusion

Well, as you have probably noticed, Warren Buffett's investing style, like the shopping style of the bargain hunter, reflects a practical, down-to-earth attitude. This attitude Buffett maintains toward also his lifestyle and overall philosophy on life: he doesn't live in a huge house, he doesn't collect cars, and he doesn't take a limousine to work. The value-investing style is not without its critics, but whether you support Buffett or not, the proof is in the pudding. As of 2003, he holds the title of the second richest man in the world, with a net worth of over $30 billion (Forbes 2003). If you choose to practice this kind of investing style, keep in mind that it takes time to do the proper analysis and to get good at it.

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What is the Buffett Investing Philosophy?

Value investing looks for stocks whose prices are low for their companies' supposed intrinsic worth, which is determined by an analysis of certain characteristics and fundamentals of companies. Mirroring the mentality and shopping style of a bargain hunter, value investors looks for products that are beneficial and high quality but cheap in price. In other words, the value investor searches for stocks that he or she believes are undervalued by the market. Like the bargain hunter, the value investor tries to find those items that are valuable but not quite recognized as such by the majority of other buyers.

Warren Buffett takes this value investing approach to another level. Many value investors aren't supporters of the Efficient Market Hypothesis but trust that the market will eventually properly start to favor those quality stocks that were, for a time, undervalued. Buffett, however, doesn't think in these terms. He isn't concerned with the supply and demand intricacies of the stock market. In fact, he is not really concerned with the activities of the stock market at all. He chooses stocks solely on the basis of their overall potential as companies--he looks at each company as a whole. Holding these stocks for the extended long term, Warren Buffett seeks not capital gain but ownership in quality companies that are highly capable of generating earnings. When Warren Buffett invests in a company, he is not concerned whether the market will eventually recognize the company's worth; he is concerned with how well that company can make money as a business.


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Buy It Like Warren Buffett

It took him long enough.

At the end of 2004, Warren Buffett's Berkshire Hathaway had around $44 billion in cash. Ditto for 2005. And 2006. And, yes, 2007 as well.

At one point, more than 20% of Berkshire's assets were earning money market returns. While armchair investors complained that the company had amassed too much capital to continue its market-thrashing ways, Buffett simply sat on Berkshire's enormous pile of cash. And waited. And waited. And waited some more.

He refused to buy until the time was right.

The time is right
Buffett has called the current mess an "economic Pearl Harbor." He has also said, "In my adult lifetime, I don't think I've ever seen people as fearful economically as they are now."

These aren't just words. Mr. Greedy-When-Others-Are-Fearful has been stuffing money where his mouth is.

That $44 billion Berkshire had at the beginning of this year? By the end of June, Buffett had spent it down to $31 billion, in deals including Berkshire's purchase of Marmon Holdings, the Mars purchase of Wrigley, and the Dow Chemical takeover of Rohm & Haas. He even bought up auction-rate securities at bargain prices.

And lately, he's been accelerating. It's nice to have cash when the credit markets are frozen.

This fall, he has committed:

$4.7 billion to purchase Constellation Energy for $26.50 per share. (It had been trading above $100 at the beginning of the year.)

$5 billion to purchase perpetual preferred stock in Goldman Sachs. He not only gets the hefty 10% dividend, but also receives warrants allowing him to buy $5 billion of common stock at $115 per share.

$3 billion to General Electric under terms similar to the Goldman Sachs deal -- except the preferred stock is callable for a 10% premium after three years. The warrants allow him to buy stock at $22.25 per share.

That's more than $20 billion spent over just one month if he chooses to exercise those warrants. Buffett's back, baby!

Buffett's buying. Should you?
Historically, average investors could simply ride Buffett's coattails to huge returns (think double the market's returns). But this time is different.

Buffett got sweetheart deals on both Goldman and GE. In the case of GE, he's earning 10% dividends on a company rated AAA -- and if he buys the warrants and they pan out, he'll earn even more.

When Buffett made these deals, he was providing much more than just capital. He was lending his credibility. That meant Goldman and GE were willing to give him great deals, in the hopes that his name alone would stabilize their stock prices for follow-on offerings.

In other words, don't buy into Goldman or General Electric just because Buffett has.

Learning from Buffett
Instead of buying what Buffett is buying, we should look to what his strategy has to teach us. So what can we learn from Buffett's shopping spree? Two things:

Invest for a lifetime.

Compile a watch list of attractive companies.

Buffett's pushing 80, but he hasn't been panicking and trying to make a quick buck, no matter what the market has done. Rather, he's been investing for the long term. In the past few years, that's meant waiting for opportunities to present themselves. Now that they are, he's striking with a vengeance.

And because of his patience, he hasn't had to compromise -- and he's getting great companies at great prices. When Constellation Energy's price dropped so precipitously in mid-September (from above $60 to the $20s), he was ready to pounce. Goldman and GE may have approached him, but you can be darn sure that he'd already done the bulk of his research beforehand.

Follow Buffett's lead
To be great investors, we need to be similarly prepared. In volatile times like these, Mr. Market presents us with loads of great values -- but just because a stock price has fallen, that doesn't mean a given company is a good value.

To wit: Here's a screen of companies that are trading at less than 50% of their 52-week highs, and are still above a market capitalization of $5 billion.

You've probably heard of most of these companies, and find their discounts tantalizing. A lot more great companies sell for half off in this market, too. How should you proceed?

One prudent way to take emotion out of the equation: Compile a list of companies you'd love to own for the long term, and the prices you'd love to pay for them. When one of your favorite companies goes on sale, you can revisit your list, ensure your investing thesis is still intact, and bend it like Buffett.


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AmEx has plenty of cash to weather this crisis. A misunderstood stock.

THE CREDIT CRISIS AND THE DEEPENING RECESSION have dealt a double blow to American Express , which has long been viewed as one of the globe's leading financial companies, due to its enviable card business and consistently high returns.

AmEx shares are off 61% this year to 20 -- back where they stood in 1997 -- and much of the drop has come since mid-September, when the stock traded at 40. Wall Street worries about the company's reliance on credit-markets funding, rising losses on its credit-card loan portfolio and weakening consumer spending worldwide.

These concerns are legitimate, but the market may have overreacted because AmEx should have enough liquidity even if credit-market conditions remain tough in 2009. The company is likely to be solidly profitable next year, even if losses spike on its $75 billion credit-card loan portfolio.

It helps that AmEx's biggest fan is Warren Buffett, whose Berkshire Hathaway is its largest stockholder with 151 million, or 13%, of the company's shares. The combination of AmEx's attractive franchise and Berkshire's stake suggests the company's stock may be near a bottom.

AmEx hasn't needed to turn to Berkshire for help because it's well capitalized compared with most major banks and brokerages, and may avail itself of various government-liquidity facilities to meet maturing debt. AmEx recently got approval to become a bank-holding company, and it is possible AmEx could merge with a bank in the next year to more quickly achieve its goal of getting a significant share of its funding from deposits.

AMEX ALSO REPORTEDLY has sought about $3.5 billion of capital under the Treasury's TARP program. That capital -- 5% preferred stock with warrants -- is more attractive to AmEx than the terms Buffett would exact.

Buffett couldn't be reached for comment -- and he rarely talks about potential investments -- but our sense is he'd probably pump in several billion dollars in new capital if needed. Berkshire also might be willing to buy the whole company if AmEx's financial condition unexpectedly deteriorates. AmEx's market value has shrunk to $23 billion, making it easily digestible for Berkshire, even assuming Buffett pays a premium. Berkshire's market value is $155 billion. Buffett usually likes paying cash for businesses, but he might be willing to make an exception and issue Berkshire equity in the case of AmEx.

Buffett knows and loves AmEx, having first invested in the stock during the 1960s. Its appeal lies in a business model based on generating fee income from consumer and business spending on American Express cards, rather than profits from a credit-card loan portfolio. More than half of AmEx's annual revenue comes from the fee charged to merchants -- now averaging about 2.5% -- on purchases made with American Express cards. Spending on the cards worldwide should top $700 billion this year, up from $647 billion in 2007.

Looking out a year, the stock could hit 30 if the company navigates the credit crisis and looks on track to earn in 2010 anything close to its target of a 30%-plus return on equity. That would imply profits of over $3 a share; it's earned a 27% return on equity so far this year.
NEXT YEAR'S PROFITS are apt to fall, along with those of most big financial companies. The Wall Street consensus for '09 of $2.50 a share seems high. We're assuming $2 a share, down from an estimated $2.59 a share this year.

Even under the gloomy scenario of Barclays Capital analyst Bruce Harting, AmEx will remain in the black next year. He cut his '09 estimate last week to $1.60 from $2.25 a share. Harting assumes that charge-offs on AmEx's domestic card-loan portfolio average 9.2% in 2009, up from 5.9% in the third quarter and 3% a year ago. He also assumes domestic spending on American Express cards falls 5% in 2009, compared with a 7% increase in the first three quarters of 2008.
AmEx CEO Ken Chenault is considered among the best financial-services executives, but he erred in rapidly expanding the U.S. credit-card portfolio in recent years to $64 billion from $38 billion in 2004. AmEx's credit-card loan losses are rising. The loss rate on AmEx's charge-card portfolio remains low at just 0.33%.

"This company can weather a huge hurricane and come out fine," says Vitaliy Katsenelson, head of research at Investment Management Associates in Denver. "American Express is one the simplest financial companies to analyze. It's much more transparent than Citigroup or JPMorgan or Goldman Sachs."

He argues that the government safety net removes a key risk with AmEx: funding. AmEx has relied on commercial paper and on securitization of credit-card loans, two markets that are difficult now to access. AmEx says it's comfortable about its ability to refinance some $24 billion in debt maturing in the next year.

The company's ratio of tangible common equity to what it calls "managed" assets of $156 billion -- which include credit-card loans financed with debt and securitizations -- is 6%, versus 4% for Goldman Sachs.

It's understandable that investors shun AmEx because of the company's exposure to the credit markets and the consumer. While next year is likely to be difficult, the company should come through in good shape. And if things get really tough, Chenault probably can pick up the phone and find a willing listener in Omaha.


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Journey to the Center of Warren Buffett’s Mind

Not so long ago, investing used to be fun. Now it resembles an Olympic archery practice at which the target is you. Maybe you felt a little safer this Thursday, when the Dow went up 553 points. Well, today it dipped by as much as 352 before closing down 338 points.

If you want to escape the arrows, you can find some refuge by reading the new biography by Alice Schroeder, “The Snowball: Warren Buffett and the Business of Life” (published by Bantam on Sept. 29, the day Congress voted down the first bailout plan and the Dow fell almost 800 points). Although he is lucky in many ways, Mr. Buffett is also the world’s most successful investor because he has worked extraordinarily hard and thought very deeply about his craft.

Mr. Buffett gave Ms. Schroeder thousands of hours of face time, a privilege earlier biographers did not have. In 1995, Roger Loewenstein’s superb book “Buffett: The Making of an American Capitalist” analyzed Mr. Buffett’s rationale for specific investments in illuminating detail, but Ms. Schroeder has been able to delve more deeply into Mr. Buffett’s mind and heart.

The result is riveting and encyclopedic. At 960 pages and 3½ lbs., “The Snowball” hits readers like an avalanche. Some people feel almost buried by the wealth of detail about Mr. Buffett’s family life, but the overall power of the story carries “The Snowball” forward. There is much to be learned from it.

To me, the most striking thing to come out of the book is a clearer sense of Mr. Buffett’s extraordinary emotional detachment. Remember, this is an authorized biography; as Mr. Buffett’s spokesperson put it, “She [Ms. Schroeder] wrote every word, and he did not edit it.”

After years of emotional isolation from the workaholic Mr. Buffett, his wife Susie “stayed up late at night alone, listening to music that transported her to some different place…. She loved…great soul music, like the Temptations, who sang of a world in which it was men who felt all the longing.”

Passages like these are heartbreaking for even a stranger to read. How many of us could bear to let someone else bare our most intimate weaknesses and failures? And yet here we not only see the pain that Mr. Buffett caused his wife, but we know that he has acquiesced in letting us see it.
This detachment, I think, is one of Mr. Buffett’s greatest strengths. He has the ability to hover over his own actions and judgments, as if he were having an out-of-body experience, looking down and evaluating the man who made them as if he were someone else entirely.

In person, Mr. Buffett is as warm and empathetic a person as anyone I have ever met — but he also seems, in Ms. Schroeder’s telling, to be forever observing himself from a distance as well. There is, in her portrait of him, a streak of something at least mildly reminiscent of autism: a photographic memory, an effortless command of complex mental computations, an enduring obsession with collecting and measuring everything imaginable.

This almost-autistic streak in Mr. Buffett exacted a terrible toll on his family as he toiled around the clock for years. Long before it was common, he worked out of a home office, and it is hard to shake the image of him padding through the house in his stocking feet, his face buried in an annual report, oblivious to his own family.

Mr. Buffett’s unparalleled record of investing achievement came at a personal price most of us would never be willing to pay; although he now has a warm relationship with his adult children, his billions were earned only at an incalculable emotional cost in their earlier years.

I shuddered several times as I read Ms. Schroeder’s account of how desperate Mr. Buffett’s family was for his affection. Anyone who thinks beating the market is easy should think twice, based on Mr. Buffett’s own experience.

The Schroeder book makes it clear that in his early years, Mr. Buffett paid a toll so high, in currency so dear, that most investors would not dare to approach the same tollbooth.
Here are the investing ideas that I think the book highlights in new detail:

Discipline. What explains Mr. Buffett’s success? His one-word answer: “focus.” For him, that meant working all hours day and night, memorizing oceans of statistics about hundreds of stocks, and reading corporate financial statements on a family trip to Mr. Buffett’s uncanny ability to stay one step ahead of the markets comes from five decades of working harder on his homework than anyone else. Can you even name the three toughest competitors of every company whose stock you own?

Self-confidence. From his father, an iconoclastic politician, Mr. Buffett inherited what he calls the knack of keeping an “inner scorecard,” rather than an “outer scorecard.” He does not care whether other people agree with him. He cares only whether his decisions make sense to him, based on his own rigorous research. Do you invest based on what “everybody knows” is “true,” or do you analyze all the evidence yourself?

Self-control. Mr. Buffett does not let the emotions of millions of strangers — the collective greed and fear of the markets — determine his own mood. When he feels his blood pressure rising or his nerves on edge, he calms himself down by gazing at snapshots of his kids or playing a game of bridge with his friends. Mr. Buffett restores his sense of self-control by refusing to dwell on the things he cannot control. Are you staring at every scarlet downtick on the Dow?

Inversion. Mr. Buffett most likes to buy stocks not when they are going up, but when they are going down. In 1969, during a raging bull market, he shut down his original investment partnership. Then, in 1974, when stocks (and market sentiment) hit rock bottom, Mr. Buffett bought with such abandon that he felt “like an oversexed guy in a harem.” Again, in 1999, as investors went gaga for technology stocks, Mr. Buffett sat on his hands. In the miserable market of 2008, he is buying again (although sometimes on “sweetheart” terms not available to you and me). Are you tempted to stand aside from stocks until after they go up?

The long view. From a very young age, Mr. Buffett developed the remarkable habit of regarding a dollar spent today as a small fortune he would not have in the future: “Do I really want to spend $300,000 for this haircut?” He felt that any money he could not invest was money that would never grow — and that he would thus incur a huge future price for any present spending. If you are among the many people cutting back your 401(k) contributions because the market has cratered, have you thought about the cumulative future costs of that decision?

Rigid versatility. Throughout his career, Mr. Buffett has been tactically flexible but strategically inflexible. His core principles have never varied one iota: Buy only what he understands, never overpay, always put safety first, be patient. But Mr. Buffett is as stretchy as Plastic Man when it comes to implementation. He will buy silver ingots, or municipal bonds, or a privately held company that manufactures both bricks and cowboy boots — whatever is on sale at the right terms. Now that virtually every investment on earth is down between 10% and 60%, is cash the only thing that interests you?

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The Warren Buffett Way: : Fixed-Income Marketable Securities

Warren Buffett is perhaps best known for his stock picking success. However, he also buys fixed-income securities. With fixed-income investments, Buffett selects between short term cash equivalents, medium-term fixed-income securities, long-term fixed-income securities and arbitrage plays. Buffett doesn't have a strong preference for which of these categories to invest in, he simply considers which investment will return the highest after-tax return and invests accordingly.

In general, Buffett considers bonds to be mediocre investments. Buffett understands that in an inflationary scenario, the purchasing power of money declines. With confidence on the stability of a currency, Buffett would become more interested in bonds. Buffett also views bonds from a "business-persons perspective". Most fixed-income returns are set below the returns that Buffett expects as a businessperson.

Buffett knows that the long-term average return on equity for American businesses is 12 percent. If an investment was made in a business that reliably earned 12 percent on equity and the company retained all of its earnings, an initial $10 million investment would be worth $300 million in 30 years. Therefore, in order to earn a businesslike return from a yield paying bond, the bond would have to pay a 12% yield and all coupons paid out would also need to be reinvested at 12%. Comparing the expected returns on investments between bonds and businesses is prudent in making a choice on where to invest.

Its noteworthy that Berkshire has historically held a much smaller percentage of fixed-income securities compared to other insurance companies. In 1993, Berkshire held only 17% of their investment portfolio in fixed-income securities compared to the 60%-80% that most of their insurance peers held in fixed-income securities

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Warren Buffett Buys Eaton Corp., ConocoPhillips, U.S. Bancorp., NRG Energy Inc., Sells Bank of America Corp.

The long awaited Warren Buffett portfolio is out today after the market close. Berkshire has a new position Eaton Corp., and adds to ConocoPhillips (COP), as GuruFocus has anticipated. These are the details of the buys and sells during the third quarter.

Warren Buffett buys Eaton Corp. during the 3-months ended 09/30/2008, according to the most recent filings of his investment company, Berkshire Hathaway. Warren Buffett owns 40 stocks with a total value of $69.9 billion. These are the details of the buys and sells.

New Purchases: ETN,
Added Positions: COP, NRG, USB,
Reduced Positions: BAC, WTM,

For the details of Warren Buffett's stock buys and sells, go to http://www.gurufocus.com/StockBuy.php?GuruName=Warren+Buffett

Added: ConocoPhillips (COP)
Warren Buffett added to his holdings in ConocoPhillips by 40.66%. His purchase prices were between $72.74 and $90.46, with an estimated average price of $80.2. The impact to his portfolio due to this purchase was 2.54%. His holdings were 83,955,800 shares as of 09/30/2008.

ConocoPhillips is a major international integrated energy company with operations in some 49 countries. ConocoPhillips has a market cap of $70.65 billion; its shares were traded at around $49.18 with a P/E ratio of 3.89 and P/S ratio of 0.31. The dividend yield of ConocoPhillips stocks is 3.61%.

Added: U.S. Bancorp (USB)
Warren Buffett added to his holdings in U.S. Bancorp by 6.27%. His purchase prices were between $25.43 and $37.53, with an estimated average price of $31.1. The impact to his portfolio due to this purchase was 0.22%. His holdings were 72,937,126 shares as of 09/30/2008.

U.S. Bancorp is a financial services holding company. They operate full-service branch offices and ATMs and provides a comprehensive line of banking brokerage insurance investment mortgage trust and payment services products to consumers businesses and institutions. U.S. Bancorp is the parent company of Firstar Bank and U.S. Bank. U.S. Bancorp has a market cap of $46.15 billion; its shares were traded at around $27.38 with a P/E ratio of 13.20 and P/S ratio of 4.06. The dividend yield of U.S. Bancorp stocks is 5.7%.

Added: NRG Energy Inc. (NRG)
Warren Buffett added to his holdings in NRG Energy Inc. by 54.41%. His purchase prices were between $26.41 and $41.97, with an estimated average price of $35.5. The impact to his portfolio due to this purchase was 0.06%. His holdings were 5,000,000 shares as of 09/30/2008.

NRG Energy Inc owns and operates a diverse portfolio of power-generating facilities primarily in the United States. Its operations include baseload intermediate peaking and cogeneration facilities thermal energy production and energy resource recovery facilities. NRG Energy Inc. has a market cap of $5.28 billion; its shares were traded at around $23.85 with a P/E ratio of 6.00 and P/S ratio of 0.83.

New Purchase: Eaton Corp. (ETN)
Warren Buffett initiated holdings in Eaton Corp.. His purchase prices were between $57.41 and $81.71, with an estimated average price of $71.1. The impact to his portfolio due to this purchase was 0.23%. His holdings were 2,908,700 shares as of 09/30/2008.
Eaton Corporation is a global diversified industrial manufacturer. Eaton is one of the leaders in fluid power systems electrical power quality and controls automotive air management and fuel economy and intelligent truck components for fuel economy and safety. Eaton Corp. has a market cap of $6.79 billion; its shares were traded at around $42.58 with a P/E ratio of 5.66 and P/S ratio of 0.46. The dividend yield of Eaton Corp. stocks is 4.45%.

Reduced: Bank of America Corp. (BAC)
Warren Buffett reduced to his holdings in Bank of America Corp. by 45.05%. His sale prices were between $21.24 and $37.48, with an estimated average price of $30.3. The impact to his portfolio due to this sale was -0.11%. Warren Buffett still held 5,000,000 shares as of 09/30/2008.

Bank of America Corp. is one of the world's leading financial services companies. Bank of America provides individuals small businesses and commercial corporate and institutional clients across the United States and around the world new and better ways to manage their financial lives. The company enables customers to do their banking and investing whenever wherever and however they choose. Bank of America Corp. has a market cap of $82.39 billion; its shares were traded at around $17.1 with a P/E ratio of 14.28 and P/S ratio of 1.80. The dividend yield of Bank of America Corp. stocks is 10.59%.

Reduced: White Mountains Insurance Group Ltd. (WTM)
Warren Buffett reduced to his holdings in White Mountains Insurance Group Ltd. by . The impact to his portfolio due to this sale was 0.97%. Warren Buffett still held 89,279 shares as of 09/30/2008.

White Mountains Insurance Group Ltd. is engaged in the business of property and casualty insurance and reinsurance. White Mountains Insurance Group Ltd. has a market cap of $3.33 billion; its shares were traded at around $348 with P/S ratio of 0.96. The dividend yield of White Mountains Insurance Group Ltd. stocks is 2.32%.


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Buffett's Berkshire Boosts Stake in ConocoPhillips

Warren Buffett's Berkshire Hathaway Inc. increased holdings in oil producer ConocoPhillips and took a stake in manufacturer Eaton Corp. in the third quarter, expanding the firm's portfolio as markets tumbled.

Berkshire had more than 83 million shares in Houston-based ConocoPhillips as of Sept. 30, compared with about 17.5 million on March 31, the company said today in a regulatory filing. Buffett also disclosed a reduced holding in Bank of America Corp. and more shares of NRG Energy Inc., the second-biggest power producer in Texas. The Standard & Poor's 500 Index dropped 8.9 percent in the three months ended Sept. 30.

Berkshire, which purchased MidAmerican Energy Holdings in 2000 and reported record profits last year from selling holdings of PetroChina Co., is betting on a long-term increase in energy demand worldwide. Global oil consumption will average 85.89 million barrels a day this year, up 80,000 barrels from 2007, according to a U.S. Energy Department report this week.

``Buffett is thinking decades ahead,'' said Jeff Matthews, author of ``Pilgrimage to Warren Buffett's Omaha'' and founder of Greenwich, Connecticut-based hedge fund Ram Partners LP. ``He's thinking about oil production falling and an eventual doubling of worldwide demand as countries like China reach U.S. levels.''

ConocoPhillips traded as low as $67.31 a share in the third quarter after closing 2007 at $88.30. The company dropped 3.6 percent today to $47.39 in New York Stock Exchange composite trading before Berkshire's filing.

Waiting for Spring

Buffett, the world's preeminent stock picker, has said he's also spending his own money to buy U.S. stocks as prices decline amid the worst financial crisis in 75 years, switching his holdings from government bonds. Berkshire, where Buffett is chief executive officer and head of investing, spent about $3.94 billion on stocks in the quarter and sold shares for about $300 million, according to separate filings.

``Most major companies will be setting new profit records 5, 10 and 20 years from now,'' Buffett said in a column in the New York Times in October. ``If you wait for the robins, spring will be over.''

Berkshire held about 59.7 million ConocoPhillips shares as of June 30, Buffett revealed in a filing. Buffett, 78, won permission from regulators to keep that number confidential until today to prevent copycat investing. Buffett's company is now the largest shareholder in ConocoPhillips.

Looking for Stability

``Energy is an industry that has the stability that he's looking for,'' said Michael Yoshikami, the president of YCMNet Advisors in Walnut Creek, California, which manages $850 million, including Berkshire shares. ``Conoco is a huge refiner, and while refiners are certainly under some pressure, they are essentially a service-for-fee business, so they are a classic kind of stable, core business for his portfolio.''

Bill Tanner, a spokesman for ConocoPhillips, had no immediate comment.

Berkshire is also the largest shareholder of companies including Coca-Cola Co. and American Express Co. as of Sept. 30, with a portfolio worth $76 billion. Berkshire has been increasing investments in the past year in banks, including U.S. Bancorp and drugmakers such as France's Sanofi-Aventis SA.

Buffett, named America's richest man by Forbes magazine, built Berkshire from a failing textile manufacturer into a $155 billion holding company by investing premiums from insurance subsidiaries such as Geico Corp. in out-of-favor securities and buying businesses whose management he deemed superior.

`Inner Workings'

Known as the ``Oracle of Omaha,'' Buffett has become a cult figure among investors, drawing 31,000 people to an Omaha arena for his annual shareholders meeting this year.

Mutual funds and individual investors mimic his stock picks in an effort to duplicate his success, and an academic study in 2007 found that using this strategy for 31 years would have delivered annualized returns of about 25 percent, double the return of the S&P 500.

``Once every three months we get a glimpse into the inner workings of the mind of the greatest investor in the history of mankind,'' said Mohnish Pabrai, founder of Irvine, California- based Pabrai Investment Funds, who holds Berkshire shares. ``Equities are the cheapest we've seen them in a very long time.''

Buffett discloses other holdings in filings with non-U.S. regulators.

Goldman Sachs

Buffett is finding other opportunities amid the economic turmoil, funding buyouts, buying preferred shares and acquiring whole companies. In the past two months, he agreed to spend $5 billion of Berkshire's cash for a stake in Goldman Sachs Group Inc., betting the Wall Street firm would be among the survivors of a worldwide credit crisis, and another $5 billion in preferred shares of General Electric Co.

He also agreed in July to lend $3 billion to Dow Chemical Co. to help fund that firm's takeover of Rohm & Haas Co., and committed $6.5 billion in April to help Mars Inc. buy chewing gum maker Wm. Wrigley Jr. Co. Berkshire's MidAmerican Energy Holdings Co. struck a deal in September to pay $4.7 billion for Constellation Energy Group Inc.

``When there are market dislocations we're always going to take advantage of them,'' Buffett told reporters at Berkshire's annual shareholder meeting in May. Deals and investments reduced Berkshire's cash holdings to $33.4 billion on Sept. 30 from $47.1 billion a year earlier, according to a regulatory filing last week.

Berkshire shares, which rose in 17 of the last 20 years, are down about 29 percent since Dec. 31. The firm has reported profit declines for four straight quarters, the longest streak in more than a decade, as insurance results worsened.

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What's Buffett Buying? Berkshire's Portfolio Snapshot Coming Later Today

Warren Buffett's Berkshire Hathaway is expected to file its quarterly portfolio snapshot with the SEC after today's (Friday's) closing bell on Wall Street. The report of Berkshire's publicly-traded U.S. stock holdings as of the end of the third quarter, September 30, could reveal whether Buffett has been buying U.S. stocks for Berkshire as enthusiastically as he has been buying for his own personal account.

There is, however, the matter of timing. Today's filing won't include any information about October. Buffett's "I'm Buying American" op-ed in the New York Times was published on October 17. The benchmark S&P 500 stock index had dropped about 18 percent from its September 30 close by then, presumably creating some of the bargains Buffett was picking up in early October. We'll have to wait until mid-February's fourth quarter filing to get some clues about last month. Three months ago, we learned that Berkshire has added a new stake in NRG Energy

While we're waiting for today's filing, check out Berkshire's holdings as of June 30 with our Portfolio Tracker. It shows you what stocks Berkshire has reported owning, how many shares and the real-time dollar value of the holdings. We've also just added another column that displays the percentage of each company's outstanding shares that are owned by Buffett & Co. And, of course, it will be updated later tonight with the latest holdings as revealed in today's filing.


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Warren Buffett makes Berkshire Hathaway proud

Warren Buffett is in the news these days after publicly expressing his confidence in the future of American corporations and recently investing $8 billion to purchase interests in GE and Goldman Sachs. With the recent stock market turmoil, many look to the world’s wealthiest man for guidance, and rightly so. Buffett is widely recognised as an exceptional judge of corporate value. “The Oracle of Omaha,” as he is known, is arguably the most successful investor in history. Corporate leaders regularly make the trek to Omaha, Nebraska, seeking his wisdom. With so much attention on Buffett’s investment acumen, it’s easy to overlook another talent: motivating people. It’s one of a host of reasons his investments tend to outperform the market.

The talented managers who run Buffett’s companies remain with him because he keeps them engaged in their jobs. In Buffett’s own words, “Charlie [Charlie Munger, Buffett’s longtime business partner] and I mainly attend to capital allocation and the care and feeding of our key managers . . . Most of our managers are independently wealthy and it’s up to us to create a climate that encourages them to choose working with Berkshire over golfing or fishing.”

A closer look at Buffett shows, at least in part, how he does it. He imparts an inspiring identity to members of the Berkshire Hathaway family. The vision he constantly communicates is that Berkshire companies are well managed and have great people. It’s not unusual to hear him tell employees to “just keep on doing what you’re doing . . . we’re never going to tell a .400 hitter to change his batting stance.” Who wouldn’t be flattered to be praised by Buffett?

Buffett shows that he values people in several ways. He is trusting and forgiving. By investing for long periods in the companies he owns, Buffett indicates that he trusts his managers. He delegates decision-making authority, in his own words, “to the point of abdication.” And when a manager makes an honest mistake, he keeps it in perspective. One manager who informed Buffett that his business had to write off $350 million was stunned when Buffett told him, “We all make mistakes . . . if you don’t make mistakes, you can’t make decisions ...You can’t dwell on them.”

Buffett models civility and respect for others. His secretary has said she hasn’t seen him mad even once in the nine years she has worked for him. The one time I met Buffett at a meeting in New York City, he patiently waited around to speak with everyone who wanted to meet him. He was attentive and focused on them, never projecting the slightest hint of self-importance.

He is confident, yet humble. Buffett knows he’s very good at what he does, and he projects an easy confidence rather than superiority or arrogance.He credits his managers for his success, remains plain spoken, works in a modest office, lives in a modest house, and proclaims thrift as a virtue (the vanity plate on his former car read “Thrifty”).

Compare Warren Buffett to Donald Trump, for example. It’s hard to imagine Buffett prominently displaying his name all over everything he owns or relishing in telling someone “you’re fired.” Instead of everything being all about him, Buffett insists it’s all about others. He appears to be guided by ‘The Golden Rule’ rather than Machiavelli’s The Prince.

Given the way Buffett treats people, it should come as no surprise that some private company owners report turning down more lucrative offers to join the Berkshire family. It is telling, that no manager who sold a company to Buffett has ever left for a competitor, and several continue to work well into their eighties. Put simply, “people want to work for him,” proclaimed another satisfied manager, Rich Santulli, head of NetJets.

Buffett promotes communication by being approachable and candid. At the annual meeting he hosts in Omaha for Berkshire shareholders, Buffett and Munger sit on a platform, listening to shareholder opinions and answering questions for hours on end. In dealing with his managers he follows the data they provide him in periodic reports and makes himself available if they want to talk. Buffett writes and speaks with candour, even pointing out mistakes he made and what he learned from them.

Warren Buffett’s ways make the managers of Berkshire Hathaway feel proud to be affiliated with the company, feel valued as human beings and feel they can communicate openly and honestly with Buffett. These feelings (or emotions) make people want to give their best effort in their work and make them more energetic, optimistic, trusting and co-operative.

Warren Buffett’s behaviour reflects common sense and yet, studies have shown that such behaviour is uncommon in practice among those with power in organisations. They are yet another reason why Buffett deserves to be called the Oracle of Omaha.

(Michael Lee Stallard is president of E Pluribus Partners, a leadership training and development organisation.)

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Berkshire Hathaway Bounces Back From 7% Plunge To Avoid Closing Below $100,000

Berkshire Hathaway shares traded below $100,000 for the first time in over two years today, but they did not close in five-digit territory.

At their lowest today (Thursday) just about three hours before the closing bell, Berkshire shares hit $96,050, a drop of 7.05% on the day.

The stock then rallied along with the rest of the market, closing at $102,800. Berkshire hasn't closed below $100,000 since October 20, 2006.

While Berkshire avoided that distinction today, its loss of $533 (0.52%) does bring it to a fresh two-year closing low.

The stock is down 31.1 percent from its all-time closing high of $149,200 last December.
Berkshire's downdraft, and a weak earnings report for the third quarter, are prompting some talk that Warren Buffett has lost his touch. CNBC's David Faber reported yesterday that some investors are shorting Berkshire in the wake of Friday's quarterly results.

Investor Doug Kass had been short Berkshire for most of the year, before covering that position at a profit in August. Now he has a new summary of what he sees as Buffett's mistakes over the past few years in a post on TheStreet.com headlined Warren Buffett Has Lost His Groove. And what about the argument that Buffett invests for the long term, making short-term setbacks unimportant? Kass writes, "Buffett's notion of long term is now becoming a convenient shroud to poorly timed investments."

"Is the notion of long term now irrelevant, particularly given Warren Buffett's age and the likelihood that sooner than later he will be succeeded by one or several new individuals at Berkshire's helm? Is it irrelevant ... in a possible multiyear bear market or in an economy that faces headwinds we haven't seen in decades? Or is it just one of those tautologies that it is safe to buy in the long term?"

Yes, Buffett has been counted out before. But this time, Kass contends, it's different.

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From WARREN E. BUFFETT

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

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Warren Buffett: Lost His Touch (Again)?

Various people are wandering about saying that investor Warren Buffett has lost his touch. The gist of the argument: A combination of style drift (derivatives?!), ill-timed investments, and his "long term" refrain on declining positions demonstrate that he is, at the very least, having a hard time right now, if not outright floundering, at least a little.

Doug Kass argues this in a morning post over at RealMoney. As he would concede, this isn't the first time Warren has been deemed ready for pasture, what with similar arguments having been made in 1999, which turned out to be premature.

Is this time different? Kass argues "Yes", with the Buffett no longer having as long a long term as he once did, and with his style drift particularly worrisome in the face of some ill-timed investments.

I’ve been arguing for some time that Buffett is feeling more pain than most people realize, but I’m also not convinced he has lost his touch either. Maybe it's time to open this conversation up. Other thoughts?

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How to spot Multibagger Stocks?

"IF you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them." -- Peter Lynch.

Easier said than done? You can make it 'easier done than said'!

Here's how:

1. Keep your eyes and ears open.
A simple way to identify potential multi-baggers is to look around for emerging sectors and new trends and invest in the leading companies participating in these trends.

For instance, some of the mega sectors (organized retail, media, telecommunications, real estate etc.) helped to create wealth for many investors who participated in those sectors in the early phase of discovery. Let’s take the example of two mega sectors - telecommunications and organized retail. If you had invested in Bharti Enterprises during their IPO in 2002 or in Pantaloon Retail when you saw their first 'Big Bazaar' store, you would have grown your investment by 18 times in Bharti and by 65 times in Pantaloon!

2. Go out, explore and see 'what's in'
Peter Lynch used to spend some weekend time for going to malls and shopping with his daughters. According to him, this was a great place to spot new stock stories and do some real market / business research. He’s found amazing stock ideas by simple observations like the favourite toy store with kids, the restaurant people frequent the most, fashion trends with teens etc. Once he would get these answers, he would research the underlying companies and find out if they were attractive investment opportunities.

This might seem like a far too easy but difficult to implement strategy but trust me, it can work. See what products are in demand, what things get picked up from shelves in super markets the fastest and so on. It might give you good insights on stock picking.

3.You can beat fund managers!
Did you know that almost 85 per cent of professional fund managers fail to beat the benchmark index at most times. Normally, fund managers have many restrictions in the kind of companies they can invest in terms of market capitalization, liquidity etc. Mostly, companies that are a part of emerging sectors are small caps or mid caps and hence, outside the radar of most fund houses.

You can do better than them by using your common sense and basic research skills. Also, investing early in the company's cycle offers you the most attractive entry price for the stock by default.

Since India is catching up with the developed world, it is one of the best markets to discover new (stock) success stories. Maybe, the next bull run will be lead by companies in healthcare, niche infrastructure, hospitality, specialty retail, entertainment, security solutions, tourism etc.

So, the next time you step outside your home, don't forget to see which is the most popular car on the road. And by the way, what brand of toothpaste do you use? This is important, since the next multibagger might be right in your home!

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AmEx Taps the TARP; Not the Same AmEx Buffett Bought

The investing thesis behind American Express (AXP) has always been that it has a higher quality of user and thus its defaults will be lower than the typical credit card issuer. Unlike Visa (V) and Mastercard (MA) who issue their cards through banks and collect a "toll" each time the card is used, Amex holds the credit balances and is essentially its own bank. This has enabled Amex in good times to earn a high return on equity as it collects the interest payments that go to the banks from the other card issuers.

All that seems to have changed. It seems, being hit by slowing consumer spending and rising defaults, AmEx is seeking roughly $3.5 billion from the TARP program.

It isn't clear if the application under the Troubled Asset Relief Program [TARP] came before or after AmEx got Federal Reserve approval Monday to become a bank-holding company.Why? Even the most affluent AmEx customers are cutting back on discretionary purchases, the company has acknowledged. A spending slowdown is particularly problematic for AmEx because its business model revolves around consumers who pull out plastic for their purchases.

That alone would not cause the problem. What would? Delinquencies and defaults on credit cards are rising. Meanwhile, the company is virtually locked out of credit markets because investors who buy consumer loans are sitting on the sidelines. All this is causing a liquidity problem. Again, like other institutions, not a solvency issue, but a liquidity one. It is also the reason we are hearing stories about AmEx card holders with no credit problems getting credit limits decreased. AmEx is trying to decrease its liabilities.

Not good news for shareholders for two reasons. The decrease in consumer spending reduces the "toll" AmEx gets when a customer uses his card. The credit limit decreases the company is placing on customers now further reduces that effect and reduces interest AmEx wil earn on outstanding balances. When you add this to the increasing defaults, you have a trouble stew.

This is not the "salad oil" fiasco that hit AmEx when Berkshire's (BRK.A) Warren Buffett bought a huge chunk of the company in the late 1970s. This is a fundamental change to the company's structure and the way it does business. The AmEx model back then was to essentially "front" customers money who would then pay it back a month later in full. Now Amex extends payment terms on almost all cards and has branched out into business lending. Now more than ever it is exposed to the consumer and his or her credit condition, not just their current spending patterns.

Previously if you did not pay your AmEx bill each month it was shut off. Now, consumers can continue to rack up debt to their limits while making minimum payments until they are tapped out. In this case, the monetary default risk for AmEx is far higher. This is causing increasing credit losses for AmEx.

The old thought that "AmEx is less sensitive to a recession" has never really been tested. The last real recession we had in the US was the 1990 one (the 2000 "recession" was a pothole). AmEx then was not nearly as exposed to the consumers' credit condition as it is now. Only now are we going to be able to test the thesis. Based on early results, it was wrong.It also means the old investing thesis needs to be rethought as it has now become less valid.

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Keep watch for Buffett's stock holding disclosure (BRK-A)

Berkshire Hathaway Inc. (NYSE: BRKA) was big news last week as third quarter profit fell 77% on difficulties in the insurance business. In the wake of the news, Berkshire shares have hit 52-week lows (technically the 52-week lows is $3,000 per share, but this was a strange intraday trading anomaly that was soon corrected).

For those investors that do not hold Berkshire shares but still maintain a fascination with the “Oracle of Omaha,” Warren Buffett, the real news was not last week but will be coming at the end of this one when his end of quarter stock holdings are made public. Thanks to the size of Berkshire’s investments, the company is required to file a 13F with the SEC detailing its security holdings. Buffett made headlines with his stock cheerleading in the New York Times in October, but it will be time to see if he put his money where his mouth was.

Granted, Buffett did make big moves into General Electric (NYSE: GE) and Goldman Sachs (NYSE: GS), but the terms were so distorted – preferred shares with favorable dividends and the option to buy more shares later at attractive pricing – that it was meaningless commentary on the market for the average investor.

It never hurts to pay attention to a man that has generated 25% annual returns for 30 years.

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