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The Warren Buffett approach

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WilkensOne

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27 November 2012
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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
 

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
 

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
 

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.
 

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

WilkensOne
Click to expand...

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.........
 
prawn_86 said:
Also have enough money that you can take stakes in the company with preferential rights and interest payments...
Click to expand...

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?
 
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.........
Click to expand...

+1

a crucial difference to timing and time frame....
 
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
 
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?
Click to expand...

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
 
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.........
Click to expand...
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.
 
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.........
Click to expand...

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.
 
TikoMike said:
I take it you haven't read The Snowball: Warren Buffett and the Business of Life?
Click to expand...

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)
 
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
 

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
 


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
 
StevieY said:
Guess what I really was asking is - will reading those books really help with DIY investing?
Click to expand...

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
 
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
Click to expand...


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
 

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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