Thursday, 11 March 2010

Buffett Lessons


It makes for depressing reading, but I couldn’t stop myself checking out the latest rankings this morning. Not my important and interesting Elo rankings, but those of the world’s richest people.

It is no longer Bill Gates at the top. A Mexican/Lebanese telecom tycoon called Carlos Slim Helu now leads the way with a net worth of $53.5 billion (give or take a few dollars).

In the last 12 months, Slim’s worth has increased by $18.5 billion! That’s $50 million a day.

The afore-mentioned Gates is ‘close’ behind in second place with $53 billion, although ‘close’ here is relative since $500 million is still a lot to most of us.

Third is investor Warren Buffett at $47 billion. I liked his recent quote in his annual report to shareholders

"We've put a lot of money to work during the chaos of the last two years. When it's raining gold, reach for a bucket, not a thimble"
which when considered with his
“be fearful when others are greedy, be greedy when others are fearful”
makes the point that if you can maintain a clear head in a frenetic market, you can do very nicely.

Value

I’m a big fan of Warren Buffett, and there are a lot that most traders can learn from him, not least his adherence to the philosophy of “value investing”.
“The basic ideas of investing are to look at stocks as business, use the market's fluctuations to your advantage, and seek a margin of safety. That’s what Ben Graham taught us. A hundred years from now they will still be the cornerstones of investing.”
Emotions

A big part of successful trading is controlling your emotions. “Don’t panic” as Corporal Jones would say. This is easier said than done of course, and it ties in with investing with stakes that you are comfortable with.

I’ve written before how I don’t have a set figure in mind that I am comfortable risking while trading, but my vital signs know when I have exceeded it! I’ve also noticed that the threshold varies according to my perceived edge. When a market is moving rapidly, it is all too easy to get caught up in the moment and be greedy when you should be fearful and vice-versa.

It’s also all too easy to overstake, because in-play, there is no time to apply the Kelly criterion and calculate the perfect amount to risk, but experience in the markets is priceless.

Warren Buffett also is an advocate of buying stocks that you understand, a philosophy that served him well when the dotcom boom was in full swing. He openly admitted to not understanding these companies, and stayed away despite critics saying he was missing out. When the brown stuff hit the fan ten years ago, Buffett was left looking rather smart.

Specialise
“Wide diversification is only required when investors do not understand what they are doing”.
I’m guessing that all liquid markets have their repeating patterns, but since there are too many for it to be possible to become an expert in them all, focus on a few. While horse-racing offers a huge quantity, they don’t (for me) offer anything like the same quality. Sixty minutes of American Football for example suits me far better than a 5 furlong sprint, or even a 4 mile chase about which others know far more than I can ever hope to know.

Modesty

The final lesson (for now) from Warren Buffett is that for all his wealth, he leads a very ordinary life, still living a somewhat ‘frugal’ lifestyle. He still lives most of the year in the same house that he purchased in 1958. He doesn’t brag about his success, but quietly goes about his business.

Words Of Wisdom

Here are some other quotes that are relevant to some degree:
"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it"

"It's better to hang out with people better than you. Pick out associates whose behavior is better than yours and you'll drift in that direction"

"I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over"

2 comments:

"Playing it safe' said...

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John said...

I'm a big Warren Buffet fan as well. My favorite Buffet quote is "What doesn't work is when you start doing things youdon't understand, or because they worked last week for someone else."