Mistakes to Avoid - Trying to Time the Market

On trying to time the market:
We don't try to pick bottoms. Sitting around and not doing something sensible (such as buying an attractively priced stock) because you think there might be a better price later doesn't make sense.

Picking bottoms is not our game — it's impossible.

- Warren Buffett

Movements of the stock market

Buffett points out that neither he nor his partner Charlie Munger can predict “winning and losing years in advance” (“we don’t think anyone else can either”), he writes that “we’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.”

- From 2008 Berkshire Hathaway Annual Letter

Value investing checklist

In simple terms 'Value Investing' means buying a stock, or indeed a business, at less than its intrinsic value.

The parameters that I have chosen include:
1. ROE and / or ROC of more than 15%
2. PE ratio less than 13%
3. Dividend yield more than 3%
4. Debt to Equity ratio of less than 1 (this parameter is not applicable for banking / financial companies)
5. Price to Book Value ratio of less than 3.5
6. Historical Growth in EPS (over last 10 years) > 7%
7. Net Margin ratio greater than 1.2 times of industry average

- Warren Buffett Watch

Buffett's best advice

If you can grasp this simple advice from Warren Buffett, you should do well as an investor.

Buffett recommends that investors look for companies that deliver outstanding return on capital and produce substantial cash profits. He also suggests that you look for companies with a huge economic moat to protect them from competitors. You can identify companies with moats by looking for strong brands, alongside consistent or improving profit margins and returns on capital.

Buffett advises that you wait patiently for opportunities to purchase stocks at a significant discount to their intrinsic values -- as calculated by taking the present value of all future cash flows.

- Motley Fool

Invest like Buffett

Buffett looks for companies that have
a) a business he understands;
b) favorable long-term prospects;
c) able and trustworthy management; and
d) a sensible price tag.


Buffett looks for companies that have competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms.

Buffett always looks at ROE to see whether or not a company has consistently performed well in comparison to other companies in the same industry.

Buffett prefers to see a small amount of debt so that earnings growth is being generated from shareholder's equity as opposed to borrowed money.

The profitability of a company depends not only on having a good profit margin but also on consistently increasing this profit margin.

Buffett’s punch card tip

Buffett said that investors could improve their returns if they were simply given a punch card with 20 slots. Each time an investor made a new investment they would punch a slot. Each investor would only get to make 20 investment decisions over their lifetime. This Buffett contends would force people to give a greater amount of thought to their investment decisions and thus make better decisions.

There are a few pieces of wisdom in this tip. First, there are a lot of forces prevailing upon us to make decisions, lots of them, and as a consequence we don’t give our decisions a lot of thought. Instituting a mental punch card forces us to slow down and think through our decisions to make sure we are making the best decision we can make.

The second bit of wisdom in Buffett’s punch card tip is that you don’t need to make a lot of decisions to achieve remarkable results. Throughout his career Warren Buffett has learned that you only need to make a few smart decisions to achieve great returns. Buffett doesn’t take just any investment pitch that’s thrown his way. He waits, and knows that he only needs to make a few smart decisions. For example, Buffett invested just over $10 million in the Washington Post Company in 1973. Today that investment is worth just north of a billion dollars. You only need one decision like that in a lifetime to be a successful investor.

Buffett's advice for Investors

For someone who is an active investor:
You don't want investors to think that what they read today is important in terms of their investment strategy. Their investment strategy should factor in that (a) if you knew what was going to happen in the economy, you still wouldn't necessarily know what was going to happen in the stock market. And (b) they can't pick stocks that are better than average. Stocks are a good thing to own over time. There's only two things you can do wrong: You can buy the wrong ones, and you can buy or sell them at the wrong time. And the truth is you never need to sell them, basically. You just make sure you own a cross section of American industry. Then they just have to worry about getting greedy. You know, I always say you should get greedy when others are fearful and fearful when others are greedy. But that's too much to expect. Of course, you shouldn't get greedy when others get greedy and fearful when others get fearful. At a minimum, try to stay away from that.

For someone who is not an active investor:
If they're not going to be an active investor - and very few should try to do that - then they should just stay with index funds. Any low-cost index fund. And they should buy it over time. They're not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock. You just make sure you own a piece of American business, and you don't buy all at one time.

Buffett's lessons for small investors

Why can't everyone invest like Warren Buffett?

Bradley's translation of Buffett's basic principles serves as a simple how-to guide for small investors:
• Keep it Simple
• Stay with your competence
• Diversification (but not too much)
• Uncertainty is your friend
• The power of compounding
• Wall Street makes its money on activity. You make your money on inactivity.

Buffett’s words of wisdom

Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.
The secret to getting rich: Compound returns. And the more money you have to begin with, the more it will compound. So taking risks with your money when you're young might not be the best strategy.

You should invest like a Catholic marries--for life.
If you view an investment as a lifelong commitment, you'll be more likely to do your homework before taking the plunge. The rewards can be huge; Buffett invested $11 million in the Washington Post Co. in 1973, and today his stake has grown to be worth $1.5 billion.

I don't try to jump over 7-foot bars; I look around for 1-foot bars that I can step over.
Buffett isn't shooting for the stars. He isn't trying to hit home runs on every pitch. He is waiting for the perfect pitch, the sure thing: Companies with business plans he understands, that sell products that won't go out of style.

My idea of a group decision is to look in the mirror.
Buffett doesn't seek affirmation from others; he prefers to go against the herd. He has often bought into companies when no one else wanted them: General Foods, RJR Tobacco, GEICO, American Express.

Invest in a business that even a fool can run, because someday a fool will.
There are businesses with great underlying economics, and businesses with poor underlying economics. You want to invest in the former, because they are hard to damage.

The most important thing to do if you find yourself in a hole is to stop digging.
If you find you're in a bad investment, stop throwing money at it. Though it's painful to pull out, in the end it is far more profitable.

If at first you do succeed, quit trying.
Buffett has always searched for excellent businesses to buy, and then once he bought them, he has held on to them, watching the stock prices grow along with the earnings. Once you make a good investment, it's better to keep it instead of selling for a modest profit and moving on.

I want to be able to explain my mistakes. This means I do only the things I completely understand.
If you don't understand what you are doing, then why are you doing it? The proper investment approach is not intuitive--it is rational.

If they need my help to manage the enterprise, we are probably both in trouble.
Just because you're a great investor, that doesn't mean you're a skilled business manager. Recognizing talent is different from having talent. Know your own abilities, and exploit them, but don't overreach.

If we can't find things within our circle of competence, we don't expand the circle. We wait.
If a company is within Buffett's circle of competence, he might buy it--but only if it is selling at the right price. If it isn't within his circle, he won't even look at it. And if he can't find an investment he understands that is selling at the right price, he will wait. And wait.