BUFFETOLOGY

BUFFETOLOGY

Hey! I just finished reading this. Sounds good to me… My partial interpretation is as below:

• Buying shares of a company is equivalent to partial ownership and the company should be analyzed as if one is buying a business.

• The product should never get obsolete, be simple to produce.

• Look at a stock as a bond with varying rates of return.

• Look at quality of management and their integrity towards maximizing shareholder value – e.g. buyback of stock, profitable acquisitions and investments…

• Look at reserves of the company and how it can be employed. Is dividend the best way of allocating the surplus or are investments better? See history of profitable investments of the company.

• Always look at annual compounded returns for a period of many years – really long term to get maximum benefit of compounding.

• Buy businesses with superior economics and having expanding value.

• Buy businesses which have a consumer monopoly or exceeding high brand loyalty – for e.g. Coca Cola. The brand will outperform the market in spite of highs and lows and is therefore excluded from the vagaries and volatilities of the stock market.

• BEWARE of commodities since usually it is the low cost producer who has maximum market share and since margins are thin profitability is eroded. Also if there is dependence on plant and machinery one can observe that periodically a large portion of reserves goes to maintain or upgrade them. Hence there is loss of opportunity
wherein the company could have invested that money and got a higher rate of return.

• Avoid companies that have low profit margins, low return on equity, poor brand loyalty, competitive pricing, excess production capacity, erratic profits and whose profitability depends on fixed assets.

• Look for companies that have consumer monopolies, brand loyalty and high goodwill. The industry should be largely unregulated in terms of pricing. Largely free from debt i.e. conservatively financed. Earnings should have an upward trend. High return on shareholder equity. Not Occasional but Consistent. Check who is giving higher returns having the same equity base.

• Look for cash cows.

• Is the company free to adjust prices to inflation without fall in demand?

• Check for Increase in Net Worth.

• Does the state of economy affect the stock?


Largely, the idea is to have a really long term view which is possible only if one really assesses the business as if one is buying it. Diversifying your portfolio is usually done when one is unsure of one’s choices. Just as you would never sell your profitable business, similarly never sell your shares. If one has this perspective one can really benefit from annual compounded growth.

STOCK MARKET STRATEGY

Stockmarket Investing

Below I have in my own amateurish way attempted to formulate a framework for investing in the Stock Exchange. I invite all interested visitors to add to the below and comment on those points which are not required or are erroneous...Thanks!


· Identify the right industry based on
o growth prospects
o valuation
o risk
o return
o short term(less than 6 months), midterm(6-24 months) or long term(2 year + )

· Identify the firms in the industry and understand
o The economics of the industry – whether oligopoly, monopoly, perfect competition etc
o Degree of concentration and /or fragmentation
o Porter model of 5 forces – rivalry, bargaining power of suppliers and buyers, threat of substitutes, barriers to entry
o Current segment of operation and possible new segments
o Supplier and customer industry study
o Govt policies regarding industry
o Life cycle of the industry
o Dependence on inputs like capital, labour, R&D, energy etc
o Dependence on economy – interest rates, inflation, CRR, GDP, trade, Strength of rupee, etc
o Benchmarked status against market leader on various parameters

· Whether that particular stock is
o Undervalued or overvalued
o Annual report analysis
o Financial Ratios
o Any other Correlations for eg. sensitivity to other indices etc

· Investor rationality index regarding a particular industry - how rational is the investor for infrastructure industry and how rational for IT industry? What is the investor profiling when it comes to risk taking and for what duration? etc...

Consonance to future trends - There could be an energy crisis in the future so renewable energy could be a good bet. To understand which industries have a greater dependence on those inputs which would be in short supply in the future for eg. power. What other future trends do we forsee?

Some interesting links:

http://metalinks.metaculture.net/science/fractal/applications/default.asp

http://www.wallstreettape.com/tutorials/ta/

http://www.sigma-research.com/bookshelf/default.htm

http://www.carleton.ca/cifp/descriptions.htm

http://www.adb.org/Economics/jel.asp#C

http://www.dailyfutures.com/links2/

http://www.performancetrading.it/Documents/HpSwingtum/HpS_Books.htm

http://papers.ssrn.com/sol3/JELJOUR_Results.cfm?form_name=journalbrowse&journal_id=200688

http://www.psychonomics.com/research/a&s/bfinancelinks.html

http://people.few.eur.nl/djvandijk/nltsmef/nltsmef.htm

http://uoutperform.com/

http://www.investopedia.com/university/

http://en.wikipedia.org/wiki/List_of_finance_topics#Valuation

http://bigpicture.typepad.com/

http://seekingalpha.com/article/3033

http://www.fool.com/school/basics/basics06.htm

http://www.ciionline.org/default.aspx

http://www.quickmba.com/strategy/porter.shtml

http://www.indiastockmarket.com/ISM/

http://www.indiainbusiness.nic.in/