# The Warren Buffett approach



## WilkensOne (30 November 2012)

Hey all,

I am just starting out learning about investments and trading, currently only have a small amount invested in shares. The forums have been extremely insightful and I am glad there is a group of aussies I can talk to!

My main question is about Warren Buffett's style of investing: buy good companies regardless of economic outlooks, reinvest dividends and hold. Which sounds all well and good to me but is it possible to derive an income from this style of investing allowing you to diversify?

If I have missed something basic, feel free to give me one of these 

WilkensOne


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## CanOz (30 November 2012)

WilkensOne said:


> Hey all,
> 
> I am just starting out learning about investments and trading, currently only have a small amount invested in shares. The forums have been extremely insightful and I am glad there is a group of aussies I can talk to!
> 
> ...




There is an interesting article here on the subject....http://http://www.usnews.com/usnews/biztech/articles/070729/6buffett.htm

There is a bit more to it than just buying good companies that have dropped due to the overall market....

CanOz


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## prawn_86 (30 November 2012)

WilkensOne said:


> My main question is about Warren Buffett's style of investing: buy good companies regardless of economic outlooks, reinvest dividends and hold. Which sounds all well and good to me but is it possible to derive an income from this style of investing allowing you to diversify?




Also have enough money that you can take stakes in the company with preferential rights and interest payments...

Do a search and there is plenty of info here on ASF


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## McLovin (30 November 2012)

WilkensOne said:


> Hey all,
> 
> I am just starting out learning about investments and trading, currently only have a small amount invested in shares. The forums have been extremely insightful and I am glad there is a group of aussies I can talk to!
> 
> ...




He doesn't reinvest dividends in the same companies, so yes you create a dividend stream that can be redeployed elsewhere...

As CanOz says, there's a fair bit more to it than just what you posted. Although the method is fairly simple, it's actually much harder to apply, IMO. There's a continum from mechanical type VI (using BV, PE etc) through to WB's style which is heavily subjective. Most people fall somewhere in the middle. 

If you buy small companies with clean balance sheets and healthy outlooks, you will probably outperform over the long run. Much of value investing is about temperment. On paper it's easy to double up when something you know is being mispriced keeps falling, in practice it isn't. Most people want results overnight, don't expect that if you go down the VI route.


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## Klogg (30 November 2012)

WilkensOne said:


> My main question is about Warren Buffett's style of investing: buy good companies regardless of economic outlooks, reinvest dividends and hold. Which sounds all well and good to me but is it possible to derive an income from this style of investing allowing you to diversify?




Warren Buffett's approach is relatively simple, but there is a lot of work involved in getting to the buy/sell decisions. 

If you get this right, then yes, it's very possible to derive an income from this style of investing... (With the average dividend yield at fairly high values, it's more possible now than it has been in a while)


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## Trembling Hand (30 November 2012)

WilkensOne said:


> If I have missed something basic, feel free to give me one of these
> 
> WilkensOne




He started with a large amount of capital at the *start *of a 50 year bull market. You are starting with little capital at the *END *of a 50 year bull market.

Results will differ from previous returns  .... the fan club will disagree but.........


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## McLovin (30 November 2012)

prawn_86 said:


> Also have enough money that you can take stakes in the company with preferential rights and interest payments...




With the exception of the deals he did during that week in 2008, when has he, as a common stock holder, taken preferrential rights over other shareholders?


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## Joules MM1 (30 November 2012)

Trembling Hand said:


> He started with a large amount of capital at the *start *of a 50 year bull market. You are starting with little capital at the *END *of a 50 year bull market.
> 
> Results will differ from previous returns  .... the fan club will disagree but.........




+1

a crucial difference to timing and time frame....


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## WilkensOne (30 November 2012)

Thanks for the link CanOz, was an interesting article. 

Don't by any means think I'm assuming his approach to be at all easy, I was more interested to know about the cash flow aspect of it. Which now makes more sense with the dividend comment.

I understand what you are saying Trembling Hand that he was apart of a great bull market, however isn't part of the approach to invest in times when there is uncertainty, such as now?

I am only 22 so I do have time on my hands, it seems many of you would opt for a different form of investing, would anymore mind enlightening me a bit?

Cheers


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## prawn_86 (30 November 2012)

McLovin said:


> With the exception of the deals he did during that week in 2008, when has he, as a common stock holder, taken preferrential rights over other shareholders?




Admittedly i dont know a lot about all of his investments, but i was under the impression that he has done this quite often even as far back as the 70's helping structure takeovers/mergers.

Even just his status means that he can probably get a more detailed look at companies books than what the average punter can, giving him another potential advantage


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## Ves (30 November 2012)

Trembling Hand said:


> He started with a large amount of capital at the *start *of a 50 year bull market. You are starting with little capital at the *END *of a 50 year bull market.
> 
> Results will differ from previous returns  .... the fan club will disagree but.........



No started in his teens with nothing but the cheques from his paper boy route.

He started well before 1970.  The partnership returns for starters are higher than what he achieved after he took over Berkshire Hathaway.


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## TikoMike (30 November 2012)

Trembling Hand said:


> He started with a large amount of capital at the *start *of a 50 year bull market. You are starting with little capital at the *END *of a 50 year bull market.
> 
> Results will differ from previous returns  .... the fan club will disagree but.........




I take it you haven't read The Snowball: Warren Buffett and the Business of Life?

Anyway, he leveraged a lot mainly through partnerships and then insurance premiums during that period. From brief memory, I think he started off with $10,000 from his paper route and racing tip sheets as a kid.


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## Trembling Hand (30 November 2012)

TikoMike said:


> I take it you haven't read The Snowball: Warren Buffett and the Business of Life?




You could name just about name any trading/investment book and be spot on about me not reading it. Only ever read 3

(maybe 4 cannot remember)


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## StevieY (30 November 2012)

Thanks for the article CanOz. 

Whilst I know asking for a recommendation of reading up Trading and Investment books will be in another thread, I just want to know if reading any of these book really do help or is it just better to speak to a financial planner, people in the know and use a bit of common sense? 

Apologies for the noob question.

Cheers,
Steve


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## McLovin (30 November 2012)

StevieY said:


> Thanks for the article CanOz.
> 
> Whilst I know asking for a recommendation of reading up Trading and Investment books will be in another thread, I just want to know if reading any of these book really do help or is it just better to speak to a financial planner, people in the know and use a bit of common sense?
> 
> ...




Depends on what you're trying to achieve. If you just want to safeguard what you have and expect pedestrian returns then a financial planner will do that, for a fee. IMO, an index fund will do the same and costs less than a planner. If you want to attempt outperformance then you need to do that on your own.


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## CanOz (30 November 2012)

McLovin said:


> Depends on what you're trying to achieve. If you just want to safeguard what you have and expect pedestrian returns then a financial planner will do that, for a fee. IMO, an index fund will do the same and costs less than a planner. If you want to attempt outperformance then you need to do that on your own.




I agree too that there are plenty of products out there that with some effort and good research you can learn to use them effectively, fee free!

These days even hedge funds are struggling to make returns so being realistic about the return is a good first step i reckon.

BTW: I read Warren Buffets bio and i was a fantastic read. 

CanOz


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## StevieY (30 November 2012)

McLovin said:


> Depends on what you're trying to achieve. If you just want to safeguard what you have and expect pedestrian returns then a financial planner will do that, for a fee. IMO, an index fund will do the same and costs less than a planner. If you want to attempt outperformance then you need to do that on your own.





Thanks McLovin. 

Like a lot of the guys here, its all about financial independence. Understand the high risk and high reward factor too but it's hard to get your head around where to start. Even reading these forums and other articles, sometimes it just does my head in. TMI comes to mind, but you're right. We need to take responsibility and do that on our own. Appreciate the heads up on index funds, but think that's already covered by super. 

The Buffet approach is a good start and have good principles that one can adhere to (they do call him the oracle don't they?) we can't all afford the luxury of 'buying power' even if you spot a value stock.  

Guess what I really was asking is - will reading those books really help with DIY investing?

While the principles of investing may remain the same, the current trading methods we now use might perhaps change or affect some of those principles? Is that a fair statement?

regards,
Steve


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## CanOz (30 November 2012)

StevieY said:


> Guess what I really was asking is - will reading those books really help with DIY investing?




I think that one needs to get an education one way or another regarding trading or investing. 

So you can either get the lesson directly from the market, or you get it from the best that's written on the subject.

CanOz


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## StevieY (30 November 2012)

CanOz said:


> I think that one needs to get an education one way or another regarding trading or investing.
> 
> So you can either get the lesson directly from the market, or you get it from the best that's written on the subject.
> 
> CanOz





Thanks CanOz. Yep, am trying to read up as much as possible and get educated, else it's just taking a punt. 

Mate got me started on Investing and he's suggesting "Couch Potato Investing" but timing is everything for that and with the speed of how things move these days, I dunno if it's a good idea, however on that same note, BECAUSE of how the markets are, maybe that's the right approach? 

Cheers,
Steve


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## ROE (30 November 2012)

StevieY said:


> Thanks for the article CanOz.
> 
> Whilst I know asking for a recommendation of reading up Trading and Investment books will be in another thread, I just want to know if reading any of these book really do help or is it just better to speak to a financial planner, people in the know and use a bit of common sense?
> 
> ...




There are some exceptional books out there while it doesn't tell you how to invest it teach you very sound principles....

Arm with those principles, you get better with time and experience...after a while it becomes a second nature and
you are no longer afraid of GFC or worldly events or some brokers said some negative things about certain stocks.

The day will come when you see something trading at X and you can spot with some degree of confident that
it's cheap and you buy.... the world will take care of itself and you get a nice passive income via dividend and
repeat for the next X stock.

time, experience and never stop learning will get you there...become a good investor is not hard nor it is easy
it requires a certain temperament and time...there are other fields that got nothing to do with investment but it will help you become a great investor...

read a couple of books on self discipline and behaviour finance I also guarantee it will help you become a better investor after you through with it


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## CanOz (30 November 2012)

StevieY said:


> Thanks CanOz. Yep, am trying to read up as much as possible and get educated, else it's just taking a punt.
> 
> Mate got me started on Investing and he's suggesting "Couch Potato Investing" but timing is everything for that and with the speed of how things move these days, I dunno if it's a good idea, however on that same note, BECAUSE of how the markets are, maybe that's the right approach?
> 
> ...




Well if that's one thing that you could safely say will remain for a while its the volatility. The markets are moving fast and there is a certain psychology behind that I'm sure.

Half the battle is just finding something that you're comfortable with, that helps you pull the trigger. Whether that's Pattern trading, Elliot Wave, Gann, value investing, averaging down or whatever. 

The deciding factor will always be the same thing...your winners need to be bigger than your losers or you need to win a heck of allot more than you lose.

Good luck!

CanOz


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## StevieY (2 December 2012)

ROE said:


> There are some exceptional books out there while it doesn't tell you how to invest it teach you very sound principles....
> 
> Arm with those principles, you get better with time and experience...after a while it becomes a second nature and
> you are no longer afraid of GFC or worldly events or some brokers said some negative things about certain stocks.
> ...




Thanks heaps ROE and CanOz. 

Your generosity with your time and advice is very much appreciated! 

Cheers!


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## ROE (2 December 2012)

CanOz is right about find something you comfortable with and stick with it, ignore all the bull**** about
volatility and buy and hold is dead or this technique is better than that....or market is now different than XXX years ago


all noises, and people forget and they make up new stories and events but the market never forget
still the same place for people to trade business and raise capital..

most business still follow the same principles, it cost you X to produce you want to sell for Y and if you a retailer
it cost you X to buy, you want to sell for Y...

just build a strong investment foundation and soon you can see through all the noises.


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## StevieY (4 December 2012)

ROE said:


> CanOz is right about find something you comfortable with and stick with it, ignore all the bull**** about
> volatility and buy and hold is dead or this technique is better than that....or market is now different than XXX years ago
> 
> 
> ...





Thanks for your time again ROE. That makes so much sense to me.  Appreciate your thoughts.


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## Gringotts Bank (8 October 2013)

WSJ.com

Billionaire Warren Buffett tossed lifelines to a handful of blue-chip companies during the financial crisis. Five years later the payoff on those deals is becoming clear: $10 billion and counting.

Mr. Buffett approached that figure after he collected another hefty payment last week, bringing to nearly 40% the pretax income on his crisis-era investments, according to a Wall Street Journal analysis.

The bounty is a vivid illustration of one of Mr. Buffett's favorite investing maxims: "Be fearful when others are greedy, and be greedy when others are fearful."

The latest windfall for the Omaha, Neb., billionaire and his conglomerate, Berkshire Hathaway Inc., came when candy maker Mars Inc. repaid $4.4 billion that its subsidiary, Wrigley, borrowed in 2008. That payment alone is expected to net Berkshire a profit of at least $680 million.

"In terms of simple profitability, an average investor could have done just as well investing in the stock market if they bought during the panic period," Mr. Buffett said in an interview Saturday. He was referring to a monthslong stretch beginning in the fall of 2008 when the stocks of some of his favorite companies, including Wells Fargo & Co. and American Express Co., fell to historic lows. "You make your best buys when people are overwhelmingly fearful."

But few investors, if any, capitalized on the crisis as expertly.

By comparison, the U.S. government invested about $420 billion through its Troubled Asset Relief Program. The government also demanded beneficial terms and collected sizable dividend payments for a return of about $50 billion, or 12%, thus far, according to the U.S. Treasury's website.

Mr. Buffett said he hopes to use the cash to make other big investments soon that will bring equally attractive returns. Berkshire will continue to buy stocks to add to its portfolio of over $100 billion, because "it's still better to have equities than cash," he said.

But big acquisitions such as the 2010 purchase of railroad operator BNSF Railway Co. for $26 billion have gotten harder to find. As prices have risen along with the economic recovery, Mr. Buffett has publicly lamented the paucity of transformative deals that would allow Berkshire to put some of its cash to use.

Starting with Mars in April of 2008, when credit markets began to tighten in advance of the financial crisis, some big-name companies looked to Mr. Buffett””and Berkshire's huge war chest””as a lender of last resort.

In addition to much-needed capital, the companies acquired something equally valuable: Mr. Buffett's implicit endorsement of their long-term prospects. Shares of these companies generally went up after they revealed Berkshire's involvement.

In six major deals, Berkshire invested a total of about $26 billion. Mr. Buffett used Berkshire's gigantic cash hoard to move swiftly and exact lucrative terms that created a stream of payments from the borrowers.

Mr. Buffett's deal-making started in the early days of the crisis and continued deep into the recovery. The last of the deals was a 2011 loan to Bank of America Corp. for $5 billion.

Besides Mars and Bank of America, Berkshire made investments in Goldman Sachs Group Inc., Swiss Re Ltd., Dow Chemical Co., and General Electric Co.

Several deals are continuing to pay hefty dividends. Berkshire also owns equity stakes in the firms, or warrants to buy them, that add several billion dollars more to the company's return on investments, at least on paper.

Although the warrants on some of these deals effectively came free with Berkshire's purchase of preferred shares, accounting rules require the company to split its cost between the stock and warrants acquired. That means Berkshire records gains differently in its books than a cash-in, cash-out tally adding up to about $10 billion.

As the economy has recovered, and with credit available at more attractive rates, some of the companies have opted to redeem securities owned by Berkshire or adjust the terms in ways favorable to Mr. Buffett.

Dow Chemical, which borrowed $3 billion from Berkshire to help fund the 2009 acquisition of Rohm & Haas, has said buying back the preferred stock is a priority.

Also last week, Berkshire became one of Goldman's largest shareholders with a $2.1 billion stake after the close of a five-year deal in which Berkshire injected $5 billion into the bank.

Berkshire bought 50,000 shares of preferred stock from Goldman that required the bank to pay $500 million in annual dividends. When Goldman redeemed the shares in March 2011, it paid Berkshire an extra $500 million as a premium.

The original deal also gave Berkshire warrants to buy 43.5 million common shares for an additional $5 billion, which would have made the conglomerate Goldman's largest shareholder. In March, the bank amended the terms to give Berkshire a smaller stake without Berkshire having to spend extra dollars.

Berkshire helped Mars finance its $23 billion purchase of Wrigley. The company has sought to refinance parts of its debt since then to take advantage of lower interest rates and an improved credit rating, a spokesman said.

Berkshire contributed $6.5 billion, including $2.1 billion for preferred stock in Wrigley that pays an annual dividend. Berkshire also bought an additional $1 billion of Wrigley debt later. Thus far, the investment is expected to net Berkshire nearly $4 billion, including annual dividends and a prepayment premium since the bonds were due in 2018.

Mr. Buffett's stake in Bank of America could pay off for years. Berkshire invested $5 billion in the bank in 2011, which adds about $300 million in annual pretax income. Bank of America Chief Executive Brian Moynihan recently said he doesn't plan to buy back the preferred shares any time soon. Berkshire also has until 2021 to exercise warrants for 700 million common shares for an additional $5 billion at $7.14 a share. Based on the bank's current stock price of about $14, the warrants create a paper profit of nearly $5 billion.

Write to Anupreeta Das at anupreeta.das@wsj.com


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## Tsubodai (8 October 2013)

Trembling Hand said:


> You could name just about name any trading/investment book and be spot on about me not reading it. Only ever read 3
> 
> (maybe 4 cannot remember)




Hi Trembling Hands

I am a newbie and would really like to know which books those were. I am working my way through Van Tharp at the moment.

Cheers,


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## TikoMike (9 October 2013)

Geez a bit unethical and sickening if this is true, is this another Warren Buffett approach to insurance claims ie asbestos victims?:

http://www.youtube.com/watch?v=cxjq_o3Xet4


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## Value Collector (6 September 2014)

I stumbled across this video interview of Warren from 1962, I thought people might get a kick out of seeing a young Warren. Didn't know where to post it, so I am posting it here.


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## ROE (6 September 2014)

Here is another, it been posted before but it good to post it again for newer player

http://basehitinvesting.com/wp-content/uploads/2013/05/The-Security-I-Like-Best.pdf


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## Huskar (6 September 2014)

Value Collector said:


> I stumbled across this video interview of Warren from 1962, I thought people might get a kick out of seeing a young Warren. Didn't know where to post it, so I am posting it here.




Awesome thanks VC and ROE


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