Enterprising Investor Forum

Following up from our recent post, here is the link to the full interview: full Morningstar w/Pabrai.

This full version is quite long but it is really worth it. They talk about entrepreneurship, his investing strategies, his valuation of Berkshire stock, the Kelly Formula, his upcoming lunch with Buffett, American Express and his overall investment style and philosophy.

Enjoy!

We are not sure how many of our readers have heard of Mohnish Pabrai, manager of the Pabrai Funds. He is a succesful entrepreneur, investor and philantropist and recently won the auction for lucnh with Warren Buffett himself!

We happen to think that Berkshire stock is very attractive at current prices (BRK-A & BRK-B) and we came across this interesting interview with Mr. Pabrai who is also very bullish on Berkshire. Furthermore, the interview talks about his book and investment philosophy.

Please find the the link to this Morningstar interview: here.

Most people in the financial community would consider this book a classic. The first sentence reads ‘In this book I will take you on a random walk down Wall Street, providing a guided tour of the complex world of finance and practical advice on investment opportunities and strategies’ - and that’s what the book is all about!

In essence, the book gives you a comprehensive investing guide that you can use throughout your lifetime. What really sets this book apart is that Malkiel takes the time, not only to take you through his theories and advice but he also explains other investment strategies out there and why he feels they are not adequate and will fail to succeed over time. Furthermore, he backs up all his claims and opinions with references to comprehensive published research.

Malkiel is a leading proponent of the Efficient Market Hypothesis, maintaining that markets are ‘efficient’ as prices already reflect all known information and therefore are unbiased in the sense that they reflect the expectations of investors about future prospects. However, despite the fact that he bases all his thinking on this theory and that some readers may not agree with him, we feel that he does a very good job at explaining why he supports this thesis and also highlights how variations can occur.

The whole book is extremely insightful and should be read by anyone who is interested in investing or managing any portion of his/her saving but the forth part of the book ‘A practical Guide for Random Walkers and Other investors’, is an absolute must read for anyone who is even slightly interested in the financial world.

Enjoy!

Next Monday we will look at stock selection…

Following up from our last post, we thought that this quote could be quite interesting for our readers. Jeremy Siegel says “Bear markets are not only painful episodes that investors must endure; they are also an integral reason why investors who reinvest dividends experience sharply higher returns.”

And speaking of dividends, remember that when markets are suffering, dividend-paying stocks start to look a bit sexier. No matter what happens in the markets, consumers will still have to buy toothpaste, toilet paper, saving cream, milk, etc… That’s why investors should start to take a closer look at long established companies with strong balance sheets, a history of dividend increase and that offer products that consumers will always need. Furthermore, companies with strong international exposure will help hedge against the US situation: Kellogg (K) is one example.

Firstly, for those of you who may not be familiar with the term:

• Bottom Fisher: An investor who looks for bargains among stocks whose prices have recently dropped dramatically. The investor believes that the recent price drop is temporary and a recovery is soon to follow.

Today, we just wanted to post a small reminder to those investors that may be mulling the idea of buying on the downside or trying to time the market. Despite the fact that we are advocates of always being on the lookout for bargains and companies that the market might be overlooking, we recommend caution when the whole market is correcting and urge investors not to try and move in and out of positions in a pure speculative manner.

Naturally, if you have been following a company for some time and have determined an ideal entry price and are looking to buy for the long-term, then you should definitely take advantage of any opportunities whilst making sure you are not too quick to pull the trigger. However, don’t try to liquidate all your holdings just to buy everything back on the cheap …. it is not advisable to try and catch a falling knife! Furthermore, numerous studies have proved time and time again that it is virtually impossible to time the market consistently (it could happen on a single occasion due to luck) and assuming you could do so, commissions will eat up a big portion - if not all -of your gains.

Some research to back-up the above:

• Burton G. Malkiel, after extensive research, concludes that you would have to have a 70% success rate every time you made a call to beat the market. He also offers a lot more statistics in his book, A Random Walk Down Wall Street*.
• Hulbert’s conclusion after studying market timing newsletters: ‘None of the newsletter timers beat the market. For the 10 years that ended Dec. 31, the timers’ annual average total returns ranged from 16.9% to 5.84%. The average return was 11.06%. During the same period, the Standard & Poor’s 500-stock index earned 18.06% annually, and the Wilshire 5000 Value-Weighted Total Return Index, a broader measure of market performance, 17.57%.’
• Benjamin Graham, in The Intelligent Investor, reports that after having analyzed accounts held at brokerage firms, there was a clear trend showing that the more the account was active, the less returns it made.

* Stay tuned for more on Malkiel and our review of A Random Walk Down Wall Street.

As most of you know, Mr. Buffett is regarded as the world’s greatest living investor. He has managed to do this by compounding his money at an average of approximately 28% per year since the beginning of the 50s. If you had invested 10,000 USD in Berkshire Hathaway in 1965 when Buffett bought it, you would have 35.6 million USD today!

How has he managed to do this? Well, his strategy revolves around the teachings of Benjamin Graham and the principles of ‘value’ investing. Buffett aims to buy shares at a significant discount to their underlying value and then holds them forever, unless the fundamentals change. Another differentiating factor is that he is not simply buying shares but he stresses the notion of ‘investing’ and acquiring ‘part ownership’ of businesses.

As Buffett puts it: “Our method is very simple. We just try to buy businesses with good-to-superb underlying economics run by honest and able people and buy them at sensible prices. That’s all I’m trying to do.”

What we love about Buffett is that his integrity and common sense have guided him throughout his whole life and allowed him to achieve truly extraordinary results without letting the money or fame ever get to him.

Anyway, we could go on for days praising Buffett… the purpose of this post is to review “The Tao of Warrant Buffet”. This book represent a collection of sayings from the man himself that basically offer the reader a unique insight on his overall approach to life and business.

To give you an idea what to expect:

• “You should invest in a business that even a fool can run, because someday a fool will.”

• “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”

• “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

• “In looking for someone to hire, you look for three qualities: integrity, intelligence, and energy. But the most important is integrity because if they don’t have that, the other two qualities, intelligence and energy, are going to kill you.”

The book offers an easy read, great quotes and is an amazing source of insight & wisdom.

Enjoy!

As markets opened down today and stocks fell sharply in early trading, it is important for the Enterprising Investor to stay calm and not panic, assuming one has done the desk research, there is no need to question current holdings due to short term moves in the markets. If anything, we would aim to keep an eye on possible buying opportunities. Seeing some of the reactions from the press and commentators urging investors to start to take profits, our thoughts went to Rudyard Kipling poem:

“If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you
But make allowance for their doubting too,
If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating,
And yet don’t look too good, nor talk too wise………”

If you would like to read the whole poem, please click here.

Why are investors staying away from Wal-Mart (WMT)? Have the smear campaigns, bad publicity, class actions suits, etc…. managed to distract us from the fact that this is a great company with strong fundamentals that is selling at a big discount and close to a 52 week low?

Wal-Mart is the world’s largest discount retailer and is steadily growing in new markets abroad. Not only are the numbers extremely interesting but we also feel that the financial community and private investors are too focused on what is happening in the States and fail to see the global picture and most importantly, potential.

Some food for thought:

We know that fair value assessment is extremely tricky, however, according to Morningstar’s calculations, the stock is worth a least 60 USD. We are not going to try and give you our own estimate but at 48 USD, we feel that his stock is defiantly worth a closer look.

Please read our Disclaimer.

Next Monday, we will take a closer look at the Dogbert Mutual Fund strategy…