Saturday, July 11, 2009

Warren Buffett's Investment Advice for You

Billionaire investor, Warren Buffett, is never short of offering investment advice. On Friday, on ABC's Good Morning America, some advices were featured.

In the interview, Bianna Golodryga, asked for his top three pieces of advices for the average American who want to grow their money and keep it safe.

His response:
  1. If it seems too good to be true, it probably is.
  2. Always look at how much the other guy is making when he is trying to sell you something.
  3. Stay away from leverage. Nobody ever goes broke that doesn't owe money.
In addition, he also finds important lessons drawn from his favorite game.

"In bridge, everything anybody does or doesn't do, you're drawing references from, including your partner and your opponents. You're working with a partner. If you don't work well with partners you're not going to have a winning bridge team over time. And everything you've learned from the past has some utility on the next hand you play. The next hand, you've never played it before and you'll never play it again in your life. But on the other hand, the problems you've solved in the past are useful in solving the problems there. And you have to keep paying attention all the time. You can't coast."

Asked if it is worth the high price for college education given the struggling economy. His response:

"Generally speaking, investing in yourself is the best thing you can do. Anything that improves your own talents. Nobody can take it away from you. They can run up huge deficits, the dollar can become worth far less, you can have all kinds of things happen. But if you've got talent yourself, and you maximize your talent, you've got a terrific asset. That doesn't mean everybody should go for college."

10 comments:

Mark Perkins said...

Do you know if he is still bullish on the US Economy in the future?

I think in his Becky Quick interview on CNBC in the middle of the crisis he was bullish. And I think he has been repeating he thinks a market index will trounce hedge funds over next 10 yrs or something. ...

Daniel M. Ryan said...

Lately, he's been plumping for a second stimulus package. He's also been critical about how the first got saddled with pork.

I don't know if that means he's turned short term bearish - I doubt it, as Mr. Buffett sounds like a permabull - but his near-term optimism seems to have waned.

Berkshire said...

HI Mark and Daniel,

Buffett is long-term optimistic on the U.S. economy - I have to be a little bit conscious using the word bullish though. Over time, the world would adjust itself to grow or be bigger than its past - though with hiccups in between. But over a period of time long enough, the economy will surely be higher than at its weakest.

In fact, I see that many money managers, or chief executives of businesses are similar to Buffett's view, they are long-term optimist. From Jack Welch, to Jeff Immelt, to Kenneth Chanault, to Jamie Dimon, to many decent investor or corporate stalwarts you can name. The thing is we wouldn't have any inkling what the economy will do tomorrow. But the way everyone is scrambling to fix the economy to restart it, it will have a positive effect 5, 10, 15 years down the road. You know, I am young, in my early 30s, I have the time to wait for it to be back to where normalcy should be.

When the eventual recovery happens, I wouldn't expect a bull market neither for I think there really isn't any events or fundamentals that really can support a high-growth-rate economy. You know, when U.S. eventually got out of the Great Depression, one of the reason was actually World War II. WWII created quite a lot of jobs and demands. Planes, armors, weapons were needed to fight a war. Then there was the aftermath of rebuilding the war-torn zone and so on.

Besides Buffett pumping for a 2nd stimulus, there're also a lot of other advocates for that too. Perhaps this current great recession is really the most life-threatening event since 1930s, or could be worst than that. So a potent drug is needed to revive it though there's a huge side effect. But there's probably no better alternative but to take the bitter pill.

The dollar will very likely weaken rather substantially against most global currency, especially asian currency. That's the effect of oversupply of any thing. I don't know how the dollar exchange will eventually pan out. I hope there won't be any sudden collapse but rather a measured decline. As long as U.S. is going to consume much more than it produces, and thus have to issue more paper to support its consumption, the U.S. debt can only go deeper which is not a good thing. I think now U.S. is starting to realize the reality, though slowly but hopefully surely. I hope Bill Gross will be correct that the saving rates for U.S. will grow to hopefully 8%. U.S. isn't all through its history a big spender. I think it is only in the late 80s and 90s that started the consumption gorging. In the 70s or 80s, U.S. saving rates were also about 8 to 10% (if i am correct).

I hope Obama can deliver what he says - to reduce the deficit but that is only a part of the remedy. Reducing deficits does not mean reducing debt. I think debt has to be reduced as a percentage of the GDP so that holders of U.S. debt will not hold hostage of U.S. on the dollar exchange value. If these holder of U.S debt were to panic or lose confidence in their holdings in U.S dollar, I would be too afraid to think of the consequences.

You know many people - including the debt holders - have to lose if there's a sudden collapse of the dollar which I think is unlikely but for sure, the dollar will be much weaken in a more measured way over time.

We know what happened to Iceland, even Ireland.

Frankie Lam said...

Hi Brian, thank you for your sharing. I am happy to find a good blog on value investing like yours.

By the way, I am also bonkers on value investing and an avid follower of buffett. I am looking forward to set up a Buffett mastermind group in Kuala Lumpur to discuss investment idea once a month.

I am a businessman and focus investor, has been picking up value stock (like Brk, Axp, Wfc, COP and Ge) since July 2008 until now. I went into the market a little bit early but grateful that i can still average down.

How about you? Any investment idea lately?

Berkshire said...

Hi Frankie,

Thank you for visiting.

I'm a singaporean. It would be good to have a forum who really believe and practice the way of Buffett. Let me know.

You are a really good selector on the plumpest of all Buffett's holdings - for sure WFC and AXP are great buys if you had gotten them even around todays' price. I am a holder of them too.

I have GE as well though not as much as WFC and AXP. GE I have a little reservation on its finance part of the business. I think they are under-reserve but the earning power of its industrial business will be able to lead it out I think but I have some reservations on GE, though I admire Jeff Immelt a lot.

COP is a good buy too at today or even $50. Even with the much lower profit, they can still easily maintain its current dividend payout with its strong cash flow. I used to own them but I sold out in exchange for WFC and AXP when they were unfairly punished about 3 or 4 mths back.

I have a number of other businesses I like but I run out of "gas." So I can only drool over it. I find Eli Lilly fairly cheap, also there is this little smaller cap company called IMS Health which I find to be cheap, they have strong cash flow, high profit margin. Just a couple of hand I can think of besides the usual suspect like JNJ, GSK, SNY and so on.

Frank said...

Thank you for your kind comment.
I am so happy to have some like-minded people like you to bounce idea.
I am also almost running out of gas already :-)
Yeah, like you, i also sold my UNH and WSC to add WFC at USD8.50 and add BRK at almost USD2,333.
Lucky that we have the courage to add on to our position during that time.
My current idea is USB, easily worth USD32 per share base on normal earning power and it is already up to USD17.60 but my target price is at USD16 :-)

By the way, my e-mail is at frankie_ktlam@yahoo.com. How can i get in touch with you?

Berkshire said...

Hi Frank,

You can contact me at dew_nay@hotmail.com.

Wow, you got both WFC and BRK at almost its lowest. My average cost was $16, double yours :)

I used to hold some UNH too.

Yes, USB is surely worth way more than what the share price indicates today. Today prices are just not normal of what a business will sell for in any privately-negotiated transaction. However, personally, I think WFC is more undervalued than USB. If we just look at the pretaxpreprovision earnings, the share price indicates that WFC is selling at about 3 times, while USB sells about than 4 times based on that valuation basis.

In fact, either USB or WFC is fine for long-term investors, both are worth more than today. But the thing for me is since I have limited cash, I feel WFC will run ahead faster than USB, when things return to normal.

Frank said...

Hi Brian,
Thank you for your thought.
Sorry, I need some tutorial from you. Where can I find the pretaxpreprovision earning figure ?

I personnaly think that USB normal earning power is about USD2 but I am not sure about WFC earning power since they took over WAMU, therefore, I dare not add into my WFC position currently.
My very conservative estimate of WFC normal earning power will be around USD2.30 only.

Just curious, if you have almost run out of gas like me, and were to take a last shot, which stock will you add on currently?

Berkshire said...

Hi Frankie,

Let me think thoroughly on the last shot question before I come back to you.

As for Pretaxpreprovision (PTPP) income, it means the total revenue minus total expenses before taxation and provision of losses.

For example, Bank A, it generates $10 billion in interest income, it has to deduct interest expense paid out for the funds borrow, say $4 billion. So the net interest income is $6 billion. This $6 billion is before provision for losses as there will surely be bad debts that the bank has lent out to. This provision for losses can never be 100% accurate, it depends on the estimation of the management, and thus a vital area where management can actually manipulate it to manage earnings.

On top, the bank would also earns non-interest income from services provided, card fees, etc, and earns say $4 billion.

So in total, the revenue of the bank is $6 billion + $4 billion = $10 billion.

Then, bank has to deduct non-interest expenses, such as salaries, rental, etc, say $5 billion.

So the pretax preprovision income is $10 billion - $5 billion = $5 billion

This is also important as it can roughly give you a guide how much bad debts out of the total loan portfolio the bank can take before eating into capital. If the bank has a loan portfolio of $100 billion, and if 5% of this are bad loans, the bank for that year will not earn any money. Something like that. Hope I explain somewhat. Let me know.

Penny Stocks said...

Warren Buffett is the premire value investor.