Thursday, January 26, 2006

Warren Buffett on Degree-of-difficulty

"Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn't count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analysed an investment alternative characterized by many constantly shifting and complex variables."

"What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know. An investor needs to do very few things right as long as he or she avoids big mistakes."

Warren Buffett on Long-term Investing

"Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value."

"We try to price, rather than time, purchases. In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess?"

Wednesday, January 25, 2006

The Law of Compensation by Brian Tracy

You Get What You Give
Ralph Waldo Emerson, in his essay, "Compensation," wrote that each person is compensated in like manner for that which he or she has contributed. The Law of Compensation is another restatement of the Law of Sowing and Reaping. It says that you will always be compensated for your efforts and for your contribution, whatever it is, however much or however little.

Increase Your Value
This Law of Compensation also says that you can never be compensated in the long term for more than you put in. The income you earn today is your compensation for what you have done in the past. If you want to increase your compensation, you must increase the value of your contribution.

Fill Your Mind With Success
Your mental attitude, your feelings of happiness and satisfaction, are also the result of the things that you have put into your own mind. If you fill your own mind with thoughts, visions and ideas of success, happiness and optimism, you will be compensated by those positive experiences in your daily activities.

Do More Than You're Paid For
Another corollary of the Law of Sowing and Reaping is what is sometimes called the, "Law of Overcompensation." This law says that great success comes from those who always make it a habit to put in more than they take out. They do more than they are paid for. They are always looking for opportunities to exceed expectations. And because they are always overcompensating, they are always being over rewarded with the esteem of their employers and customers and with the financial rewards that go along with their personal success.

Provide the Causes, Enjoy The Effects
One of your main responsibilities in life is to align yourself and your activities with Law of Cause and Effect (and its corollaries), accepting that it is an inexorable law that always works, whether anyone is looking or not. Your job is to institute the causes that are consistent with the effects that you want to enjoy in your life. When you do, you will realize and enjoy the rewards you desire.

Action Exercises
Here are two things you can do immediately to put these ideas into action.

First, remind yourself regularly that your rewards will always be in direct proportion to your service to others. How could you increase the value of your services to your customers today?

Second, look for ways to go the extra mile, to use the Law of Overcompensation in everything you do. This is the great secret of success.

Warren Buffett on Mr. Market

"Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his."

"Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him."

"Mr. Market has another endearing characteristic: He doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you."

"Following Ben's teachings, Charlie and I let our marketable equities tell us by their operating results - not by their daily, or even yearly, price quotations - whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it. As Ben said: "In the short run, the market is a voting machine but in the long run it is a weighing machine." The speed at which a business's success is recognized, furthermore, is not that important as long as the company's intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price."

"[Many] investors who expect to be ongoing buyers of investments throughout their lifetimes... illogically become euphoric when stock prices rise and unhappy when they fall. They show no such confusion in their reaction to food prices: Knowing they are forever going to be buyers of food, they welcome falling prices and deplore price increases. (It's the seller of food who doesn't like declining prices.) Similarly, at the Buffalo News we would cheer lower prices for newsprint -- even though it would mean marking down the value of the large inventory of newsprint we always keep on hand -- because we know we are going to be perpetually buying the product.

"The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do. For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments."

"A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves."

"But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

Warren Buffett on Margin of Safety

"We insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success."

Warren Buffett on Investment Education

"To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing, or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses: How to Value a Business, and How to Think About Market Prices."

Tuesday, January 24, 2006

Peter Lynch's investment secret

I think the secret is if you have a lot of stocks, some will do mediocre, some will do okay, and if one of two of 'em go up big time, you produce a fabulous result. And I think that's the promise to some people. Some stocks go up 20-30 percent and they get rid of it and they hold onto the dogs. And it's sort of like watering the weeds and cutting out the flowers. You want to let the winners run. When the fun ones get better, add to 'em, and that one winner, you basically see a few stocks in your lifetime, that's all you need. I mean stocks are out there. When I ran Magellan, I wrote a book. I think I listed over a hundred stocks that went up over ten-fold when I ran Magellan and I owned thousands of stocks. I owned none of these stocks. I missed every one of these stocks that went up over ten-fold. I didn't own a share of them. And I still managed to do well with Magellan. So there's lots of stocks out there and all you need is a few of 'em. So that's been my philosophy. You have to let the big ones make up for your mistakes.

In this business if you're good, you're right six times out of ten. You're never going to be right nine times out of ten. This is not like pure science where you go, "Aha" and you've got the answer. By the time you've got "Aha," Chrysler's already quadrupled or Boeing's quadrupled. You have to take a little bit of risk.

Excerpt from "Betting on the market"

Thursday, January 19, 2006

Learning from Warren Buffett's lectures to University of Kansas students

The Lotus Sermon of Warren Buffett

* Your inner scorecard is more important than your outer scorecard. It's very important for people to evaluate how they behave over a lifetime morally and ethically and not be overly concerned with other people's impressions. Keep an inner scorecard: judge yourself by your own standards. This keeps you focused when you have many people giving you advice.
* You should do the job you love whether or not you are getting paid for it. I didn't know my salary when I went to work for Graham until I got his first paycheck. Do what you love and don't even think about the money.
* If there is a place that is warm in the winter and cool in the summer, and you do what you love doing, you will do fine. I will take a trip on Paul Allen's Octopus ($400M yacht), but wouldn't want one for myself. A 60 man crew is needed. They could be stealing, sleeping with each other, etc.

Zen and the Art of Inner Happiness

* You're rich if you are working around people you like. You will make money if you are energetic and intelligent. This society lets smart people with drive earn a very good living. You will be no exception.
* Hang around people who are better than you all the time. You do pick up the behavior of people who are around you. It will make you a better person. Marry upward. That is the person who is going to have the biggest effect on you. A relationship like that over the decades will do nothing but good.
* A person must have a passion for the business they are in - they have to prefer going to work that day than any other option in the world. I consider myself unable to ever retire because what I do for a living is not a job in my eyes. I don't work.
* I was lucky because I knew what I loved at an early age. I was wired in a certain way when I was born, and I was lucky enough to stumble upon some books at a library at a very early age. In 1930, I won the ovarian lottery. If I had been born 2000 years ago, I'd have been somebody's lunch (laugh). I wasn't strong and I couldn't run fast.

Learn from Past and Focus on the Present

* My biggest mistakes were errors of omission vs. commission. Berkshire Hathaway was also a big mistake.
* Sometimes the opportunity costs of keeping money in something (like a lousy textile business) can be a drag on Berkshire's performance. We didn't learn from the previous mistake and bought another textile mill (Womback Mills) 6-7 years after buying Berkshire Hathaway. Meanwhile, I couldn't run the one in New Bedford.
* Don't worry about mistakes. You'll make mistakes. Get over it. At the same time, it's important to learn from someone else's mistakes. You don't want to make too many mistakes.
* Don't take yourself out of the game because you are fearful of making mistakes. You have to be able to make mistakes to make decisions.

Ignore the Macro Stuff

* Risk premiums are mostly nonsense. The world isn't calculating risk premiums. I don't think that the stock market will return 6.5% over bonds in the future. Stocks usually yield a little more, but that isn't ordained. Every once in a while, stocks will get very cheap, but it isn't ordained in scripture that this is so.
* There is a recent WSJ article written by Jeremy Siegel that discussed funds flowing out of investments because baby boomers will need to cash in their investments during retirement. I respect Siegel, but I don't find fund flows data useful.
* We aren't big on demographic trends. It's difficult to translate that information into profitable decisions. It is hard to figure out what businesses will prosper in the future, based on macro trends. See's candy is for anyone and Fruit of the Loom is for people who need underwear today.

Focus on the Present "Here and Now"

* We want to be right on something that will work right now, not something that might work in the future. I doubt that Wal-Mart spends a lot of time on demographics. They instead focus on where to put the store and what to put on the shelves. I've never found those kinds of [demographic] stats useful. People were all excited to go into stocks 6 years ago, but it wasn't because of demographic trends.
* There is no rerun button in life...the time to do things you want to do is today. If there is a job you want to do - do it today. It's important in life for students not to worry about building a resume they think others want to see.
* [Editor's note: A single-minded focus on the present moment, here and now, is the central idea of the oriental wisdom of Zen.]

The Financial World Is Full of Illusions

* There is no doubt that there are far more "investment professionals" and way more IQ in the field, as it didn't use to look that promising. Investment data are available more conveniently and faster today. But the behavior of investors will not be more intelligent than in the past, despite all this.
* How people react will not change - their psychological makeup stays constant. You need to divorce your mind from the crowd. The herd mentality causes all these IQ's to become paralyzed. I don't think investors are now acting more intelligently, despite the intelligence.
* Smart doesn't always equal rational. To be a successful investor you must divorce yourself from the fears and greed of the people around you, although it is almost impossible.
* Do you think Ponzi was crazy? The tech and telecom madness that existed just 6 years ago is right up there with the craziest mania's that have ever happened. Huge training in capital management didn't help.
* Take Long Term Capital Management. They had hundreds of millions of their own money, and had all of that experience. The list included Nobel Prize winners. They probably had the highest IQ of any 100 people working together in the country, yet the place still blew up. It went to zero in a matter of days. How can people who are rich and no longer need more money do such foolish things?
* Humans are still made up of the same psychological makeup, and opportunities will always present themselves. All these people have not gotten more rational. They are moved by fear and greed. (Note: Buddha said, people are suffering from illusions and delusions. An awakening or enlightenment is needed to free the mind from fear and greed.)

Excerpt from "Buffett - The Ultimate Financial Zen Master" By Brian Zen

Warren Buffett on "The prices of many raw materials and corporate margins"

It depends on the business. Our carpet business has been very affected by rising oil prices. We have lagged being able to put through the hikes to our customers. We want to protect our retailers somewhat. Johns-Manville uses a lot of natural gas, so the rise of natural gas prices has hurt margins.

Businesses with strong positions tend to be able to pass through higher raw material costs, just as they can pass through higher personnel costs. Higher materials costs is really a form of tax, but on the consumer, not on the business. Corporate profitability as a percentage of GDP is at an all-time high right now, so it wouldn't be surprising if that number were to fall. Notably, corporate taxes as a percentage of all taxes paid is at an all-time low.


We like to buy businesses that we think have untapped pricing power. In 1972 when we were looking at See's, we asked ourselves, if prices were raised by 10 cents per pound, would sales fall? We believed they would not. You're not in a great business if you have to have long management discussions before you raise prices. The newspaper industry 30 years ago had a lock on advertisers' business, because it owned the only megaphone in town that local advertisers could use to reach consumers. Rate hikes were a big yawn to most publishers. They didn't care about alienating subscribers or advertisers. They raised prices when newsprint prices went up, and then raised prices when newsprint prices went down. Now publishers agonize over price increases. They don't want to drive advertisers away to other media. And they don't want to drive away readers; when they leave, they never come back. You can learn a lot about a business by the machinations it goes through to raise prices. It's been tough to raise prices in the beer business lately, which is not a good economic sign.

Notes From The 2005 "Woodstock-of-Capitalists"

Warren Buffett's advice to a young person who's interested in investing

I got started when I was 7. I wasted my life before that. My father worked at Harris, Upham in Omaha. The stock market was open a half day on Saturday then, and I used to go down to his office Saturday mornings. I read a lot-everything I could find on investing and the stock market. When I was 11 I bought three shares of stock. Then I read Ben Graham when I was at Nebraska. My advice is to read everything in sight, and to start young. If you start young and read a lot, you'll do well.

There are no secrets to investing that only some select priesthood knows. Successful investing requires a quality of temperament, not a high IQ. You need an IQ of 125, tops-anything more than that is wasted. But you do need a certain temperament, and must be able to think for yourself. Then constantly look for opportunities. You can learn every day. You can't act every day, but you can learn every day. It's like any game, if you enjoy playing it, you'll do well. But start early, and follow a framework that's been successful.

Notes From The 2005 "Woodstock-of-Capitalists"

Warren Buffett on Anheuser-Busch

The decision to buy the stock took about 2 seconds. I've been reading Anheuser-Busch annuals for 25 years. (I've owned 100 shares of the stock, as I have many other stocks, so I can get easy access to their annual reports.) Beer sales in the U.S. have been flat for several years. Wine and spirits have gained market share at the expense of beer. Miller has been rejuvenated to some degree, as well. So Anheuser has had to spend more lately to maintain market share, and has had to engage in promotional pricing. But the business is easy to understand, and Anheuser's business in particular is still extremely strong. The story of the U.S. beer business over the past 50 years is fascinating. Right after World War II, Storr's had over 50% of the market in Omaha. But the large, national players have steadily consolidated the business. In the 1970s, Schlitz was the biggest-selling brand nationally. The beer business won't grow significantly in the U.S., but Bud's popularity is growing worldwide. Bud will be strong. The company's earnings won't do much for some time-but that's ok with us.

Notes From The 2005 "Woodstock-of-Capitalists"

Wednesday, January 18, 2006

Learn entrepreneurship from Ben Franklin

For anyone, who wants to be a successful entrepreneur in this century, you can actually learn from one, who's born 300 years ago. His name is Ben Franklin. If you know Chinese, you can read this article for free from this link.

Two of the most important learning points for many aspiring entrepreneurs are:

* 富兰克林遵循了谨慎原则,自己只做雇员不做老板,在选定的行业里学习,让别人去冒风险。一个叫凯默(Keimer)的印刷商给了他一个栖身之所。弗兰克林很快就开始策划自己创业,加入竞争。(Ben Franklin was a conservative person. He decided to be an apprentice first and learned from the boss of a publishing house because he had no experience of publishing, even though he resolved to be an entrepreneur at the beginning. This helps him to eliminate most of the risks when he began his own business.)

* 富兰克林不仅勤奋,而且认识到炫耀勤奋能带来的公关价值。他在大街上用手推车运送纸浆,“证明我没有不屑于干这一行”,“不仅认真展示自己在现实中的勤奋……还避开一切与之相反的负面形象。” (Ben Franklin was not only hard-working, he understood the image of a hard-working man can bring great publicity. So he showed his hard-work to all the people around him and tell them his passion about his business.)

There's no better ways to learn from Ben Franklin than to follow his 13 virtues:

1. TEMPERANCE. Eat not to dullness; drink not to elevation.
2. SILENCE. Speak not but what may benefit others or yourself; avoid trifling conversation.
3. ORDER. Let all your things have their places; let each part of your business have its time.
4. RESOLUTION. Resolve to perform what you ought; perform without fail what you resolve.
5. FRUGALITY. Make no expense but to do good to others or yourself; i.e., waste nothing.
6. INDUSTRY. Lose no time; be always employ'd in something useful; cut off all unnecessary actions.
7. SINCERITY. Use no hurtful deceit; think innocently and justly, and, if you speak, speak accordingly.
8. JUSTICE. Wrong none by doing injuries, or omitting the benefits that are your duty.
9. MODERATION. Avoid extreams; forbear resenting injuries so much as you think they deserve.
10. CLEANLINESS. Tolerate no uncleanliness in body, cloaths, or habitation.
11. TRANQUILLITY. Be not disturbed at trifles, or at accidents common or unavoidable.
12. CHASTITY. Rarely use venery but for health or offspring, never to dulness, weakness, or the injury of your own or another's peace or reputation.
13. HUMILITY. Imitate Jesus and Socrates.

His method of acquiring these virtues is even more inspiring:

"My intention being to acquire the habitude of all these virtues, I judg'd it would be well not to distract my attention by attempting the whole at once, but to fix it on one of them at a time; and, when I should be master of that, then to proceed to another, and so on, till I should have gone thro' the thirteen; and, as the previous acquisition of some might facilitate the acquisition of certain others, I arrang'd them with that view, as they stand above. Temperance first, as it tends to procure that coolness and clearness of head, which is so necessary where constant vigilance was to be kept up, and guard maintained against the unremitting attraction of ancient habits, and the force of perpetual temptations. This being acquir'd and establish'd, Silence would be more easy; and my desire being to gain knowledge at the same time that I improv'd in virtue, and considering that in conversation it was obtain'd rather by the use of the ears than of the tongue, and therefore wishing to break a habit I was getting into of prattling, punning, and joking, which only made me acceptable to trifling company, I gave Silence the second place. This and the next, Order, I expected would allow me more time for attending to my project and my studies. Resolution, once become habitual, would keep me firm in my endeavors to obtain all the subsequent virtues; Frugality and Industry freeing me from my remaining debt, and producing affluence and independence, would make more easy the practice of Sincerity and Justice, etc., etc. Conceiving then, that, agreeably to the advice of Pythagoras in his Golden Verses, daily examination would be necessary, I contrived the following method for conducting that examination.

"I made a little book, in which I allotted a page for each of the virtues. I rul'd each page with red ink, so as to have seven columns, one for each day of the week, marking each column with a letter for the day. I cross'd these columns with thirteen red lines, marking the beginning of each line with the first letter of one of the virtues, on which line, and in its proper column, I might mark, by a little black spot, every fault I found upon examination to have been committed respecting that virtue upon that day.

"Form of the pages.

"I determined to give a week's strict attention to each of the virtues successively. Thus, in the first week, my great guard was to avoid every the least offence against Temperance, leaving the other virtues to their ordinary chance, only marking every evening the faults of the day. Thus, if in the first week I could keep my first line, marked T, clear of spots, I suppos'd the habit of that virtue so much strengthen'd and its opposite weaken'd, that I might venture extending my attention to include the next, and for the following week keep both lines clear of spots. Proceeding thus to the last, I could go thro' a course compleat in thirteen weeks, and four courses in a year. And like him who, having a garden to weed, does not attempt to eradicate all the bad herbs at once, which would exceed his reach and his strength, but works on one of the beds at a time, and, having accomplish'd the first, proceeds to a second, so I should have, I hoped, the encouraging pleasure of seeing on my pages the progress I made in virtue, by clearing successively my lines of their spots, till in the end, by a number of courses, I should he happy in viewing a clean book, after a thirteen weeks' daily examination."

Tuesday, January 17, 2006

Warren Buffett talks

Warren Buffett on the dollar

"I think over time that -- unless we have a major change in trade policies, I don't see how the dollar avoids going down. I don't know when it happens, I don't have any idea whether it will be this month or this year, or next year. But we are force-feeding dollars on to the rest of the world at the rate of close to a couple billion dollars a day, and that's going to weigh on the dollar. I see no way around that."

Absolutely, if things can't go on infinitely, it will stop at some time. (Just that you don't know when)

Warren Buffett on Market Trend

"I never try to predict the market. I've made money over the years by buying into good companies, run by good people, at attractive prices. And I don't try and make it out of buying into the market at one point and selling at another point. I'm having a hard time finding things to buy, if that says anything about the market. But really -- if I find something tomorrow to buy, I don't give a thought as to whether the market is going up or down. I just barrel in. "

Learning points:
  • If you buy at an attractive price (relatively), maybe you worry less about whether it's in the "Bull" market or "Bear" market.

Warren Buffett on gold

"$50 billion worth of gold mined each year. The utility of gold does not command that much gold. In 1900, gold was trading at $20/ounce. It was revalued in '33 at $35/ounce. In '70 it traded freely at $20. Now its at $500 today. It offers no income, plus you have storage and insurance expenses. The S&P or Dow has done a lot better, plus it pays you dividends. Gold is a lousy long-term investment. It has to be. There simply is not that much intrinsic value. Oil and certain other commodities have much more utility. I like assets that are producing money all the time; gold just sits there."

Warren Buffett's Advice to Journalism Students

Recently, Warren Buffett hosted a visit by a group of students from Medill’s Integrated Marketing Communications and school of journalism graduate programs. He gave a speech with the following key points:

  • Treat investing like journalism. Just as a reporter would want to find out something that most people don't know about, you want to do the same for the companies you are analyzing. However, ninety-ninepercenty of the information out there is redundant.
  • You only have one life. If you have something or a job that you would like to do, do it today.
  • There must be a passion for the business you are in. There's no such thing as retirement because work is play and play is work. If you look at the top managers in his companies, you will find most of them working even up to eighty or ninety plus years old.
  • Your inner scorecard is more important than your outer scorecard. Don't worry about building a resume that you think others want to see.
  • Never get into something if you have the intention of someday wanting to get out of it.

Monday, January 16, 2006

Charlie Munger on becoming a good investor

"If you're going to be an investor, you're going to make some investments where you don't have all the experience you need. But if you keep trying to get a little better over time, you'll start to make investments that are virtually certain to have a good outcome. The keys are discipline, hard work, and practice. It's like playing golf -- you have to work on it."

Excerpt from "The Best of Charlie Munger" by Whitney Tilson

Sunday, January 15, 2006

The Friendship Factor

The Selling Process
In selling, we know that there are three parts to the process. These are, first, establishing rapport with the prospective customer, second, identifying the problem or need that the prospective customer has and, third, presenting the solution. These are the ethos, the pathos and the logos of selling to someone.

Build Good Relationships
Your success in every area of life will be based largely on the quality and quantity of relationships that you can initiate and develop over time. In the world of business and sales today, relationships are everything. We often call this the “friendship factor.” We have discovered that a person will not do business with you until he or she is convinced that you are his or her friend and are acting in his or her best interest. In other words, you cannot influence someone unless he or she likes you in some way. Of course, it’s often possible for you to influence a person if he fears you, but that type of influence lasts only until the person can rearrange his situation and escape from the circumstances that enable you to have control over him.

How To Influence and Persuade Others
The way to influence people, then, is to earn their liking and respect, to appeal to the friendship factor. This requires spending time with him, caring for him and respecting him. The more time that you are willing to spend with the person, the greater will be his tendency to trust you and to feel that you are acting in his best interest. The more obvious it is that you care about the person, about what he really needs, the more likely it is that he will be open to your influence. This is even more important in your personal relationships, with your family and friends. The more that people feel you care about them, the more open they will be to your influence.

Here's what you should do during a first-time meeting in a business or sales situation:

First, slow down when you first meet a person in a business or sales situation. Take some time to build a relationship with him or her before you proceed to business matters.

Second, appeal to the friendship factor that underlies all good business and personal relationships. Ask questions about the person and his or her life and concerns. Listen attentively to the answers. Focus on the relationship first.

Excerpt from "The Friendship Factor" By Brian Tracy

Wednesday, January 11, 2006

Warren Buffett bought Korean stocks

In 2004, Mr. Buffett says, he began buying Korean stocks for his personal brokerage account, investing a total of $100 million in roughly 20 Korean companies. He says that the investments were too small to be appropriate for the Berkshire portfolio. "These were not Berkshire-size remotely," he says.

He picked the stocks, which he declines to name, by leafing through a reference book compiled in Korea and provided by Citigroup to some clients. The book devotes a single page to each listed company. "You look for solid-looking companies at very low multiples of earnings, and sometimes with the added bonus of lots of excess cash," he said. After the shares rose in price, he unloaded some of them, though he still calls them cheap.

Learning points:
  • You can pick stocks anywhere as long as you are displined.

Tuesday, January 10, 2006

Jim Rogers on Asia

In 10 years there will be two great cities in Asia. Shanghai would be No.1 and Singapore No. 2. Of course, there is Tokyo. But the rest of Asia's cities will be second-tier. I don't think Hong Kong will be up there. I don't think China would need Hong Kong once Shanghai gets going, so putting money in Hong Kong property is a waste of time. Hong Kong likes to think that China needs it for its people. There are plenty of smart Chinese in Shanghai and given time they will outsmart people in Hong Kong. I will make this fearless forecast about Indonesia. In 10 years' time, it will be in several pieces. I doubt it can survive in its present form.

Excerpt from "On The Road Again" in APRIL 27, 2001 VOL.27 NO.16

Quote of the day

"The real measure of success is the number of experiments that can be crowded into 24 hours." – Thomas Edison, inventor

How do you measure your success?

Thursday, January 05, 2006

Peter S. Lynch's Ten Most Dangerous Things People Say About Stock Prices

1.) "If it's gone down this much already, how much lower can it go?" (answer: Zero)

2.) "If it's gone this high already, how can it possibly go higher?" (some of the best companies grow for decades)

3.) "Eventually they always come back." (no they don't - there are lots of counterexamples)

4.) "It's only $3 a share, what can I lose?" ($3 for every share you buy)

5.) "It's always darkest before the dawn." (Its also always darkest before it goes absolutely pitch black. Don't buy a business just because price dropped and it is cheaper now)

6.) "When it rebounds to my cost, I'll sell." (The stock does not know you own it! Don't take it so personally Note: this comment is explained by the well documented psychological tendencies called loss aversion and anchoring bias which are talked about in Behavioral Finance. If you liked it at ten, you should love it at 6 so either buy more or sell)

7.) "What me worry? Conservative stocks don't fluctuate much." (There is no such thing as a conservative stock - the average stock fluctuates between 50% to 70% from its high to its low price every year. There is a graveyard where all the "conservative" stocks get buried. Companies and businesses change!)

8.) "Look at all the money I lost - I didn't buy it!" (Don't beat yourself up about the missed opportunities because it is not productive - when he managed the Magellan Fund, he almost never owned one of the 10 best performing stocks in a given year, but he did fine anyway).

9.) "I missed that one. I'll catch the next one." (Doesn't work that way)

10.) "The stock has gone up - so I must be right" or "The stock has done down - so I must be wrong." (Technical analysis is not worth much. So many people like something at 20 and hate it at 12 - never made much sense to him).

Exerpt from "The Wit and Wisdom of Peter Lynch" By Kaushal B. Majmudar, CFA

Peter S. Lynch's Fundamental's of Investing

1.) Know What You Own - Most people don't really know the reasons why they own a stock - you should. Ed's Note: Similar to Ben Graham and Warren Buffet's Businesslike Investing in your Circle of Competence

2.) It is Futile to Predict the Economy, Interest Rates and the Stock Market(So Don't Waste Time Trying) - "If You Spend 13 minutes per year trying to predict the economy, you have wasted 10 minutes" Focus on the "facts" now at hand rather than predictions about the future

3.) You Have Plenty of Time - to identify and recognize exceptional companies. If you bought WalMart AFTER it rose 10x in its first 10 years, you got another 60x return over the next 30 years. Bottom line: Don't be in a rush - look at plenty of stocks, but be patient. Note: Buffett's "Wait for the Perfect Pitch"

4.) Avoid Long Shots - his record was ZERO out of 25 investing in companies with no revenues but a "bright future" to sell. His advice if you run across a company that falls into this category but still excites you - do nothing and write down the name. Look at it again in 6 to 12 months and see if you still think it is good. If it is one of the good ones and went from 5 to 15 while you waited, per point #3 above, you probably still have plenty of time. Note: Following this rule could keep you out of trouble. Benjamin Graham and Warren Buffett talked about avoiding Speculations and focusing on Investments instead

5.) Good Management is Very Important and Buy Great Businesses - good management is very important - maybe even the most important consideration. It may also be the most difficult item on this list to get right. His advice: look for good companies because a good management in a bad business will probably fail. "Buy a business any fool can manage because eventually one will" Buffett has also observed that when a good management meets a bad business, it is the reputation of the business that generally prevails.

6.) Be Flexible - lots of unexpected things happen, some good and some bad. Many of his best nvestments happened for the "wrong" reasons, i.e. his original thesis was off, but the investment still worked out. Sometimes he was absolutely right about the growth but the investment was still lousy and he did not make any money. So be flexible and humble

7.) Knowing When to Sell is Hard - before you make a purchase, you should be able to explain why you are buying/own it in terms that an 11 year old could understand - three sentences at most. Remember this reason and sell the holding when the reason no longer continues to hold. Investing well does not take a genius - only need 5th grade math - so math has nothing to do with being a great investor

8.) There is Always Something to Worry About - and this makes things interesting. The 1950s were one of the best decades to own stocks, but from a geopolitical basis everyone was scared of nuclear war. In the early 1990s, everyone was scared about the Japanese taking over the world and beating America. Not coincidentally, more all-time worst market days occur on Mondays because people have the whole weekend to WORRY. His advice is to forget about all the global bad stuff because the key to good investing is not the brain/intellect, its having the stomach.

Excerpt from "The Wit and Wisdom of Peter Lynch" By Kaushal B. Majmudar, CFA

Wednesday, January 04, 2006

What are the characteristics of a great product?

According to Guy Kawasaki, a great product should have the following characteristics. I think it's quite true for some category of products such as eletronics:

  • Deep. A great product is deep. It doesn't run out of features and functionality after a few weeks of use. Its creators have anticipated what you'll need once you come up to speed. As your demands get more sophisticated, you discover that you don't need a different product.
  • Indulgent. A great product is a luxury. It makes you feel special when you buy it. It's not the least common denominator, cheapest solution in sight. It's not necessarily flashy in a Ferrari kind of way, but deep down inside you know you've rewarded yourself when you buy a great product.
  • Complete. A great product is more than a physical thing. Documentation counts. Customer service counts. Tech support counts. Consultants, OEMS, third-party developers, and VARS count. Blogs about it counts. A great product has a great total user experience¡ªsometimes despite the company that produces it.
  • Elegant. A great product has an elegant user interface. Things work the way you'd think they would. A great product doesn't fight you¡ªit enhances you. (For all of Microsoft's great success this is why it's hard to name a Microsoft product that you'd call ¡°great.¡±) I could make the point that if you want to see if a company's products are elegant, you need only look at its chairman's presentations.
  • Emotive. A great product incites you to action. It is so deep, indulgent, complete, and elegant that it compels you to tell other people about it. You're not necessarily an employee or shareholder of the company that produces it. You're bringing the good news to help others, not yourself.

"If you want a smashing example of DICEE product, you need not look any further than iPod. Deep: thousands of songs, podcasts, and recently video plus third-party add-ons that have added functionality Apple never anticipated. Indulgent: yes, you could buy a cheaper MP3 player, but that's not the point, is it? Complete: total integration with online buying, Apple's support (other than a battery or two), and online support by independent web sites. Elegant: One wheel does it all, right? Emotive: How did you first find out about it?"

The learning point for an investor is to be able to recognize the company with such a franchise product or service early and buy into it.

Monday, January 02, 2006

Quote of the day

"The key to writing is editing."

The 10/20/30 presentation rule

According to Guy Kawasaki, a PowerPoint presentation should have ten slides, last no more than twenty minutes, and contain no font smaller than thirty points. While I'm in the venture capital business, this rule is applicable for any presentation to reach agreement: for example, raising capital, making a sale, forming a partnership, etc.

Ten is the optimal number of slides in a PowerPoint presentation because a normal human being cannot comprehend more than ten concepts in a meeting - and venture capitalists are very normal. (The only difference between you and venture capitalist is that he is getting paid to gamble with someone else's money). If you must use more than ten slides to explain your business, you probably don't have a business. The ten topics that a venture capitalist cares about are:
  1. Problem
  2. Your solution
  3. Business model
  4. Underlying magic/technology
  5. Marketing and sales
  6. Competition
  7. Team
  8. Projections and milestones
  9. Status and timeline
  10. Summary and call to action

You should give your ten slides in twenty minutes. Sure, you have an hour time slot, but you're using a Windows laptop, so it will take forty minutes to make it work with the projector. Even if setup goes perfectly, people will arrive late and have to leave early. In a perfect world, you give your pitch in twenty minutes, and you have forty minutes left for discussion.

Excerpt from Guy Kawasaki's "The 10/20/30 Rule of PowerPoint"

  • Follow Guy's rules to make presentations: simple and clean; Force yourself to be familiar with the material you are going to present.