Mid Week Pit Stop #5

So far I have talked about three main aspects of trading - mentality, emotions and money management. I realise that some part of this blog should also be catered to those who wish to invest rather than trade. For those who wish to purchase rock solid stocks and just ignore the market completely and only to come back and realise that they have made some good money off those stocks after some years. Does this style appeal to you?

We all know who to look up to when it comes to investing - Warren Buffett.

There are tons of books out there written about Warren Buffett and in my opinion, none of them emphasizes enough on the key essence of Buffett's investing style. Trust me, I have read many books about Warren Buffett before.
As Buffett would often say about Graham’s teachings: “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

Two key phrases here - "stocks as business" and "margin of safety". However I will emphasize only on "stocks as business" partly because I don't think that I have grasped the concept of margin of safety. It sounds like "buy at the bottom" LOL. Doubt I can explain it properly either.
"If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you'd need. If you're driving a truck across a bridge that says it holds 10,000 pounds and you've got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it's over the Grand Canyon, you may feel you want a little larger margin of safety..."- 1997 Berkshire Hathaway Annual Meeting

Maybe I will try to explain it a little. It is something like, "You know DBS is a rock solid company but it is not good stock to buy when STI is at 3800 and DBS at $24 and people are buying like there is no tomorrow. Get it?"

Basically to a small extent, be a contrarian and buy when people are selling. That's how you squeeze out your margin of safety. Of course you dont buy in a bear market. Argh... it is quite difficult to explain. I guess I will stop here.

Most of Buffett's success should be contributed to his ability to identify "superior companies". Value investing and searching for bargains merely give him enough stakes to plunge into these "superior companies" and this is exactly the difference why you can never be a Warren Buffett. To understand this, we have to look at three companies - Coca-Cola , Gillette and American Express.

He began buying Coca-Cola stocks in 1988. Within few months, he had amassed stocks up to 7% of the company at about $1.02 billion dollars. Well the rest is history. Before I proceed, I will like to throw a question to you guys. What is considered a good business?

The answer is a "Monopoly". He sees the intangible value of Coca-cola. That for many years down the road, everyone will drink a can of Coca-cola. I don't know how Coke tastes like in 1988 but I believe it is the very same taste that I get from 7 eleven. If I were to put a can of Coca-cola and a can of Pepsi in front of you, what would you choose? Throw this question to all your friends and tell me the answer. This is exactly what he sees for many years to come. Coca-cola is so close to a monopoly. It is in a league of its own. I like Sarsi though =D. But still, Sarsi is under Coca-cola! In 1988, he can see what millions of people simply cannot. The intangible "monopoly value" of Coca-Cola.

Same thing goes for Gillette. He can imagine every men in the world holding a Gillette shaver in the morning in the future when he was about to purchase Gillette stocks. In fact, every women in the world may follow as well (not every morning obviously lol). In a way, Gillette is also very close to a monopoly. It is this ability to see the intangible value that made him bought the stock and separated himself from all the other financial wizards on the street. If you say you can only understand a business and see it prospering for 10 years, Buffett can see it for 50 years.

Honestly if he understands techonology stocks, I am pretty sure he will buy Microsoft. After all it is his good friend's business.

Lastly we have American Express. I think this stock sums up his investing theory. Buying good stocks at cheap prices. Due to a massive scandal, the company incurred a large one time loss which caused panic selling of American Express stock. While the world was doubtful of American Express’ prospects to survive, Buffett thought the contrary. It was said that he stood behind a counter and observed customers signing off bills with AmEx credit card. He probably knew that US was going to be or already a "Credit Nation" and sooner or later, everyone would be using credit cards.

Most people classify these companies as growth business citing reasons that as more people exist, more of such products are wanted. However, they fail to highlight why are there only few companies created to seize a small portion of the market share. It is this intangible side of the company - the monopolistic side of it. Most books talk a lot about the cheap price that Buffett buys his stocks at but they never emphasize the characteristic of those stocks enough.

Look at companies like Apple and Google. Google search engine vs Yahoo search engine. Apple gadget vs everyone's else. What are the intangible side of these two companies? Maybe you want to think of what I have mentioned and looked at these companies again.

Quick Update

Hmm, things are looking good for me this week. Oil is good and pushes dollar down, which brings Gold up even further. What a connection that is. Olam is also showing some weakness closing at $2.85. I don't know what happened to Noble, it plunges 15% on Monday. Celestial is now at $0.91.

AMR is probably the best call I have made so far. Plunges another 10+% today. It is now at $6.8. I covered all 9 lots at $7.2 which were bought at about $9. Shorted them again at $6.8 because I think oil will march pretty fast. Kinda expected oil inventories to fall short today as oil touched $130 pretty easily in the morning. Well, I have to credit AMR call to Mr. X, one of my good friends in America. He told me about the US airlines situation. The customer dissatisfaction was already widespread long before the survey was out.

If you are holding stocks, hold on tight, I believe the oil super spike is here and we are going to plunge real hard, as least to the bottom trendline of the range that I have talked about previously.

“Wide diversification is only required when investors do not understand what they are doing.”

Warren Buffett