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Saturday, October 4, 2008

The Book: The Warren Buffet Portfolio

No, I don't know of any connection between Warren Buffet and Washington recently (other than the reported relationship between him and Katharine Graham in Monday’s Washington Post),

but I read so you don't have to:

Subtitle: Mastering the Power of the Focus Investment Strategy (John Wiley and Sons)

From these pages and this old (1999) book, I offer a few tips garnered which may prove helpful, especially with the erratic market.

For definitions, try and BusinessDictionary, and I love Google's finance pages.

* Index funds are usually better than mutual funds.

* Focus on return on equity rather than earnings per share.

* Invest in no more than 15 companies. (Buffet prefers 10).

* Buy low!

*Keep your turnover rate between 10 and 20%, and Buffet thinks lower is better. (Do I have to define turnover rate? Okay: from For a mutual fund, the number of times per year that an average dollar of assets is reinvested. )

*Hold for a minimum of five years. (Holding reduces transaction costs and raises after-tax returns. Also, when you hold for several years, say, 10, you reduce your risk.)

*Hold on during bumps. ("It's going to be a rocky ride" said Ms. D.)

*Hold forever if the company is performing above-average, to wit, do not sell superior companies.

(You often hear about the "beta factor" which is a degree of correlation between the stock market as a whole and an individual stock. If a company's stock has a beta of 1, it means the stock is rising and falling exactly with the market. If a company's beta is 2, it is rising and falling twice as fast as the market, meaning it is riskier than the market, and the inverse is true: A beta less than 1 means the stock is "safer" with less risk than the market and therefore, generally performing below the market.)

*Share price is not as important as a company's intrinsic value since an investor may be able to purchase a company's stock at bargain rates. Study stocks selling lower than their intrinsic values. (How do you figure intrinsic values?)

*Compare annual reports of a company you like with similar companies. Compare performance with forecasts. Look for low ratio of price to book value, low price/earnings ratio or a high dividend yield. The value of any investment is the present value of future cash streams.

For additional reading the author recommends Philip Fisher's Common Stocks and Uncommon Profits: Paths To Wealth Through Common Stocks, now considered a classic and re-issued in 2007 by Wiley with a foreword by Fisher's son, Kenneth Fisher.

Buffet respects John Maynard Keynes.

Note to self: Check out the Sequoia Fund.

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