Daryl Guppy: Dow May Crash to 7,500 If 10,600 Not Breached

Seeing there’s been quite a bit of interest in my recent comments on CNBC about the historical parallels between the Great Depression and the recent financial crisis, I thought it may be appropriate to elaborate further on the chart technicals behind the observation.

The causes may have been different, but the collapse of the U.S. markets in early 2008 followed the same behavioral patterns as the collapse in 1929. The recovery pattern seen in 2010, is also very similar to that developed in 1930.

The crash of the Dow Jones Industrials in 1929 was signaled by the development of a well defined head and shoulder pattern, seen most clearly in its monthly chart. It is a reliable pattern that captures the behavior of investors who are becoming increasingly disillusioned about the future prospects for economic growth.

The downside pattern targets in the 1929 Dow were exceeded with a fall of around 49% before the market recovered in 1930. The 2008 dow pattern targets were also exceeded with a market fall of around 52%.

In 1930, the market developed an inverted head and shoulder rebound pattern recovery that led to a 46% rise in the market.  The Dow rebound in 2009 also developed from an inverted head and shoulder pattern. This was a powerful rise of around 69%.

The historical development of the recovery in the DOW in 1930 ended with a new head and shoulder pattern. This was followed by a rapid market decline that created the first part of a long term double dip pattern. This retreat also exceeded the pattern projection targets with a fall of 28%.

Fast forward to today, we’re seeing the Dow is developing a new head and shoulder pattern which indicates a beginning of a bear market. The rally peaks in the Dow appear in January and May and June. The downside projection taken from the neckline of the pattern sets a target at 8,400, or a 25% decline.

A very bearish analysis using the pattern of retreat behavior in 1930 suggests the Dow could retreat to around 7,500 in 2010.

The head and shoulder pattern in the Dow and its downside targets, are invalidated with a sustainable rise above 10,600.  A move above this level does not signal a resumption of the uptrend, but it does reduce the probability of a double dip.

It must be noted that while the behavioral patterns in 1930 and 2010 are similar, they don’t necessary point to the same result. But it does sound a warning that markets could continue to stand on the edge of a precipice.

Source: 2010 CNBC, Inc.

Disclaimer: Please be informed that the above mentioned stocks/indexes/investment instruments are solely for the purpose of education; it is NOT a recommendation or an invitation to trade/invest. For trading/investment advice, please speak to your remisier, dealer representative or financial adviser. Please understand that there is risk in every trade/investment venture, know your risk first before you venture into any of them.

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Harry S. Dent, Jr: Is The Pullback Over? Don’t Bet On It!

HS Dent is an economic research and forecasting company that works diligently to provide Financial Professionals and individuals with the proprietary economic tools needed to accurately forecast what lies ahead in U.S. economy based on The Dent Method – the only documented record of success at forecasting long term economic trends.

The Dent Method, developed by company Founder and economic expert Harry S. Dent, Jr. in the late 1980’s, is a long term economic forecasting technique based on the study of and changes in demographic trends and their impact on our economy. It works by showing how predictable consumer spending patterns combined with demographic trends allow us to forecast the economy years or even decades in advance. Harry S. Dent, Jr. is the author of “The Great Depression Ahead”, “The Next Great Bubble Boom”, “Roaring 2000s Investor”…etc.

Source: HS Dent

Disclaimer: Please be informed that the above mentioned stocks/indexes/investment instruments are solely for the purpose of education; it is NOT a recommendation or an invitation to trade/invest. For trading/investment advice, please speak to your remisier, dealer representative or financial adviser. Please understand that there is risk in every trade/investment venture, know your risk first before you venture into any of them.

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RED ALERT!! It Looks MORE Like 2nd Tsunami Wave Rather Than Just A Normal Correction!

Since my last post on WARNING!! Is The 2nd Tsunami Wave Here Or Is This Just A Normal Correction, it seems that the stock markets, especially the European and U.S. stock markets, are acting like a toy balloon in a room full of razor blades. Even China SSE is not spared, it is already down 31% since August 2009. Worst case scenario is that U.S. maybe set for a rare double-dip recession that will send its unemployment soaring, home values crushing and may trigger another new round of banking and credit crisis.

7 reasons for my pessimism:

1. Sovereign debt crisis leaving investors worried: More and more investors are viewing Europe’s sovereign debt crisis as a sneak preview of the future in U.S. After all – U.S. debts is far greater than the PIIGS (Portugal, Ireland, Italy, Greece, Spain)!

2. High U.S. unemployment rate: Despite everything Washington has tried to do, nearly 1 in 4 American workers is still struggling to get by without a paycheck. Worse: The job growth of recent months has now dwindled to nearly nothing. After 431,000 new jobs were created in May, only 83,000 appeared in June.

3. 70% of the U.S. economy is beginning to shut down: Domestic consumption is responsible for 70% of all economic activity in U.S. – and consumer confidence is cratering. Worse: U.S. retail sales are already plunging!

4. The housing slump in U.S. has returned with a vengeance: New home sales just cratered by 33%, the biggest decline on record. Foreclosures are increasing again, creating new nightmares for U.S. largest banks. Worse: ARM(Adjustable Rate Mortgage) resets just started in May this year and more foreclosures is expected, as explained in my post U.S. Housing Crisis Over? Re-think Again! 2nd Wave Maybe Coming!

5. Most U.S. states drowning in debt, eg. New York, California and others going down for the 3rd time: The 50 U.S. states now have a cumulative deficit of US$127.5 billion. Plus, states have more than US$1 trillion in pension obligations they can’t pay. They must make massive spending cuts to survive - cuts that are sure to impact corporate earnings and stock prices from coast to coast.

6. U.S. economy is quickly running out of gas: The recovery that followed the bear market was bought and paid for with US$2 trillion in government stimulus money. Now, that money is running out! U.S. economy and stock market are running out of steam. And with no new stimulus on the horizon, there’s nothing left to keep stocks from declining. If U.S. goes down, rest assured that the rest of the world will be pulled down as well, including our little red-dot called Singapore.

7. China’s economy maybe slowing down: With Europe as one of its largest exporter, the Europe’s debt crisis is going to hit the demand for Chineses goods.

In my humble opinion, I feel that we have NOT seen the low of the global stock markets and I expect to see further decline from here. Short-selling is the way to ride this current market weakness. In fact, people should consider liquidating their long positions into any rallies, rather than buying aggressively into the market right now. In view of the possibility of high inflation, precious metals, like gold, silver, commodities, natural resources and hard assets are also good instruments for us to protect our precious wealth.

I really hope that I am wrong and I have to admit that I always am! Please be prepared for the worst as we will see more bumpy road ahead!! I want to stress again that the downside risk is much higher than the upside potential at this point of the time. So please be extremely careful!

Disclaimer: Please be informed that the above mentioned stocks/indexes/investment instruments are solely for the purpose of education; it is NOT a recommendation or an invitation to trade/invest. For trading/investment advice, please speak to your remisier, dealer representative or financial adviser. Please understand that there is risk in every trade/investment venture, know your risk first before you venture into any of them.

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World Collapse Explained in 3 Minutes!

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Peter Lynch: 8 Simple Investing Principles

Peter Lynch ran Fidelity’s Magellan Fund from 1977 to 1990, beating the S&P 500 in all but two of those years. He averaged annual returns of 29%. That’s a mind-blowing figure. It means that $1 grew to more than $27; if you invested as little as $37,000 with him in 1977, you were a millionaire in 1990.

Fortunately for us, he’s willing to share his secrets. To achieve his stunning track record, he clung to 8 simple principles. Here they are:

1. Know what you own
Seems elementary, right? But as someone who talks to lots of investors, I can report that you’d be shocked at how few investors actually do their research. Scroll down to No. 7 for a good first step in getting ahead of the game.

 

2. It’s futile to predict the economy and interest rates (so don’t waste time trying)
After 2008’s crash, I noticed a distinct increase in armchair economists. We financial types do enjoy water cooler talk about interest rates, trade deficits, debt levels, etc. But there’s a danger in converting thought into action.

The U.S. economy is an extraordinarily complex system, with 300 million people acting in their own self-interest and responding to each others’ actions, government incentives, and external shocks. And that’s before we factor in our increasingly frequent interactions with the rest of the world.

Trying to time the market is futile. Set up a financial plan that allocates your assets based on your risk tolerance, so that you can sleep well at night.

 

3. You have plenty of time to identify and recognize exceptional companies
Lynch mentions that Wal-Mart was a 10-bagger — i.e. its stock rose to 10 times its initial price — 10 years after it went public. Even if you had gotten in after waiting a decade, though, you’d be sitting on a 100-bagger.

Some would argue that it’s still not too late to get in on Wal-Mart, decades after going public. While the company’s no longer a monster growth story, it continues to crank out 20% returns on equity year after year. That type of consistent ROE is a huge positive indicator of management’s ability to effectively allocate capital.

A similar tale can be told about Microsoft’s early growth years, right on down to its still-impressive current return on equity (42%).

And Amazon.com, though only 13 years old as a public company, has seen its stock double since its 10th birthday. Of these three, it’s the only company still trading at growth-stock valuations. Bulls are hitching their wagon to Amazon.com’s ability to expand its role as the premier online retailer, and its upside in the cloud-computing space.

The lesson of Wal-Mart, Microsoft, and Amazon.com? You don’t need to immediately jump into the hot stock you just heard about. There’s plenty of time to do your research first. See No. 1.

 

4. Avoid long shots
Lynch claims he was 0-for-25 in investing in companies that had no revenue but a great story. Remember, the guy who averaged 29% returns went oh-fer on long shots. You and I are unlikely to do much better.

Use companies with proven track records as our baseline. ExxonMobil, IBM, and Procter & Gamble are selling for 9, 11, and 16 times forward earnings, respectively. This is what the market is charging for solid, low-to-moderate-growth companies that dominate (or at least co-dominate) their spaces. Expect to pay more for higher-growth prospects, but make sure the risk-reward trade-off on an unproven company is worth it.

 

5. Good management is very important; good businesses matter more
The pithier Lynchism is: “Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it.”

For a prototypical example of a so-easy-a-caveman-could-run-it company, think the aforementioned Procter & Gamble.

 

6. Be flexible and humble, and learn from mistakes
Lynch has said: “In this business, if you’re good, you’re right six times out of 10. You’re NEVER going to be right nine times out of 10.”

You’re going to be wrong. Diversification and the ability to honestly analyze your mistakes are your best tools to minimize the damage.

 

7. Before you make a purchase, you should be able to explain why you’re buying
Specifically, you should be able to explain your thesis in three sentences or less. And in terms an 11-year-old could understand. Once this simply stated thesis starts breaking down, it’s time to sell.

 

8. There’s always something to worry about.
Lynch noted that investors made a killing in the 1950s despite the very new threat of nuclear war. There are plenty of fears to choose from right now, but we’ve survived a Great Depression, two world wars, an oil crisis, and double-digit inflation.

Always remember, if our worst fears come true, there’ll be a heck of a lot more to worry about than some stock market losses. Lynch’s parting shot is that investing is more about stomach than brains.

Peter’s principles in action
So there you have it. These are the 8 principles Peter Lynch used to bring the market to its knees. They seem simple, but trust me, sticking to them is harder than it sounds.

 

Source: Motley Fool

Disclaimer: Please be informed that the above mentioned stocks/indexes/investment instruments are solely for the purpose of education; it is NOT a recommendation or an invitation to trade/invest. For trading/investment advice, please speak to your remisier, dealer representative or financial adviser. Please understand that there is risk in every trade/investment venture, know your risk first before you venture into any of them.

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U.S. Housing Crisis Over? Re-think Again! 2nd Wave Maybe Coming!

Tuesday, October 9, 2007 started as a nice day in New York City. A lovely early fall day, with the temperature still a balmy 80° at 2:00 in the morning. By evening, though, the temperature had dropped twenty degrees, the clouds had rolled in, there was thunder and rain.

As with the weather, there were some hints of trouble here and there on Wall Street. But all in all, things could not have seemed better. Little did we know, the stormy end of 9/10/07 signaled a very large bubble that had just popped.

That was the day when the Dow Jones Industrial Average hit its historic peak. From there, it was all downhill — slowly but steadily at first, and then violently after August — until the Dow bottomed (for now) on March 9 of last year. Over that span, the index lost 54% of its value.

It’s been a crushing blow to just about everyone. But it’s already being referred to as the crash. As if the unpleasantness were now all behind us. More likely, in the future it will be seen as, simply, the first crash.

Don’t believe it? In a moment you will, when you see the scariest graph of the year.

But let’s quickly recall what’s already happened. During the late, great housing boom, interest rates were at microscopic levels, while bankers were encouraged to grant home loans on little more than a wink and a nudge. In order to inflate their balance sheets, those bankers resorted to all sorts of gimmicky, adjustable rate mortgages (ARMs), whose common feature was an interest rate that would eventually reset. That is, it would balloon somewhere down the road. And those most likely to come quickly to grief were the riskiest borrowers, who held loans known as “subprime.”

“But not to worry,” borrowers were told. “Betting on ever-rising home prices is the safest wager in the whole wide world. If you have problems with cash flow when the ARM resets, your house will be worth a lot more, so you can simply sell it and walk away with a nice chunk of change in your pocket.” Uh-huh.

The bankers themselves were a little more concerned about the deterioration of their portfolios. They took out insurance in the form of credit default swaps (CDSs). These were a brand-new invention in world financial history, allowing mortgages to be sold and resold until they were leveraged 20 times over. They became the shakiest part of a huge global derivatives market, with a nominal value in the tens of trillions of dollars.

For a while, this Ponzi scheme even worked. But then, as they had to, the ARMs began resetting, and there were defaults. Then more of them. Because at the same time, the housing market was cooling off and the economy was stalling out. More and more people were trapped in a situation where they owed more on their home than they could sell it for. Many simply mailed their keys to the bank and moved on.

All of this wreaked havoc in the derivatives market. Sellers of these exotic packages could no longer establish what they were worth. Buyers couldn’t determine a fair price and so stopped buying. As the ripples spread through the world financial system, trust disappeared and liquidity dried up.

Now consider that the base cause for all that dislocation was the subprime sector. And how big is that? Not very. Subprime mortgages account for only about 15% of all home loans. Their influence has been way out of proportion to their numbers, because of derivatives. Here’s the good news: the subprime meltdown has about run its course. These loans were resetting en masse in 2007 and the first eight months of ‘08. Now they’re pretty much done.

And the bad news? No one in the mainstream media seems to be asking what should be a pretty obvious question: What about loans OTHER THAN SUBPRIME? Truth is, the banks didn’t just trick up their subprime loans. ARMs were the order of the day – across the board.

Now, here’s that frightening graph we referred to earlier.

 

 

Take a good, long look. You can see that from the beginning of 2007 through September of 2008, subprime loans (the gray bars above) were resetting like crazy. Those are the ones people were walking away from, sending a shockwave from defaults and foreclosures smack into the middle of the economy. Now they’re gone.

The ARM market got very quiet between December 2008 and March 2009, hitting a low that won’t be seen again until November of 2011. Small wonder a few “green shoots” have poked their heads above ground. But in April, resets began to increase and will reach an intermediate peak in June. After that, they tail off a little, going basically flat for the next ten months.

It’s not until May of 2010 that the next wave really hits. From there to October of 2011, the resets will be coming fast and furious. That’s 18 months of further turmoil in the housing market, and the beginning is either HERE or not too far away!!

While it isn’t subprime ARMs that are resetting this time, neither are they prime loans. Those eligible for prime loans wisely tended to stay away from ARMs in the first place, as indicated by the relatively small space they take up on each bar.

No, the next to go are Alt-A’s (the white bars), Option ARMs (green) and Unsecuritized ARMs (blue). Alt-A’s are loans to the folks who are a small step up from subprime. Unsecuritized loans are a 50-50 proposition; either the borrowers were good enough that they weren’t thrown into the CDS pool, or they were so risky no one would insure them.

Those two are bad enough. But Option ARMs are the real black sheep, loans with choices on how large a payment the borrower will make. The options include interest-only or, worse, a minimum payment that is less than interest-only, leading to “negative amortization”-a loan balance that continually gets bigger, not smaller. Imagine what happens with those when the piper calls.

Once the carnage begins, will it be as bad as the subprime crisis? That’s the $64K question. Perhaps not. For one thing, subprime loans were a much larger chunk of the market when they started going south. For another, there’s been a lot of refinancing as interest rates dropped; that should help ease the default rate. And the government has massively intervened, with measures designed to prop up those who would otherwise lose their homes.

On the other hand, we’re experiencing a slow down in the economy, which wasn’t the case when the subprime crisis started. More people will be unable to meet payments. And the housing market has continued to decline, pressuring both marginal homeowners and banks that can’t sell foreclosed properties.

Is the stock market’s next 9/10/07 on the way? Yes. Which day will it be? That’s unknowable. It could be HERE, in a week, or not for another year.

But make no mistake about it, the second crash is coming. It can’t be prevented, no matter what desperate measures Obama and his hapless financial advisors come up with. All we can hope for is that, with a little luck, it won’t be as severe as the first one. But it will last longer. We aren’t even in the middle of the woods yet, much less on the way out.

 

Source: www.gold-eagle.com

Disclaimer: Please be informed that the above mentioned stocks/indexes/investment instruments are solely for the purpose of education; it is NOT a recommendation or an invitation to trade/invest. For trading/investment advice, please speak to your remisier, dealer representative or financial adviser. Please understand that there is risk in every trade/investment venture, know your risk first before you venture into any of them.

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WARNING!! Is The 2nd Tsunami Wave Here Or Is This Just A Normal Correction?

The 1^st Tsunami wave in the stock market happened in 2008. Prior to that, bubbles were observed in February 2007(Singapore stocks dropped by 11.6% because of the 15% decline in China market) and July 2007(further 19.7% slide when MM Lee warned us about the U.S. sub-prime problems and government’s anti-speculative measures to cool the red-hot property market). The final bubble burst in October 2007 and that signalled the start of the 62% decline in STI!!

Since March 2009, we have seen a tremendous bull run, driven more by stimulus plans and bailouts from central governments around the whole world, rather than a solid recovery in the real economy. This year 2010 alone, we have just seen a 9.6% correction in January and till to date a 8.6% decline in STI in 3weeks. I believe the damage has been done, we MAY have just seen the start of the 2^nd wave of Tsunami or very strong signals that we are not too far away from it. Several reasons:
1) PIIGS(Portugal, Ireland, Italy, Greece and Spain) debts crisis,
2) U.S. total funded and unfunded debt amounting to about US$130 TRILLION, it may go into double dip recession in 2011
3) China economy maybe over-heating and possible property bubble there
4) Goldman Sach criminal fraud charges imposed by SEC
5) Dramatic increase in Option Adjustable Rate Mortgage(OARM), Agency and Alt-A Monthly Mortgage Resets in U.S. 2^nd wave of mortgage resets are around the corner and they are peaking in 2011, thus causing more foreclosures in U.S.
6) Terrorism (a major terrorist activity occur around once every 8-9 years, based on the book “The Great Depression Ahead” by Harry S. Dent, Jr. The last major terrorist attack was on 11 September, 2001.

Fundamentally, Singapore is well prepared for this financial crisis :
1) Opening of 2 Integrated Resorts (IR)
2) Youth Olympic will be held on 14  – 26 August this year
3) Possibility of General Election happening in 2010 (based on history, Singapore stock market has normally performed well prior to the election)

But we have to understand that Singapore is just a little red dot which relies very much on export, we will be badly hit if huge economies like U.S., Europe, Japan, China…etc were to run into crisis again, like what had happened in 2007 and 2008.

Personally, I believe we MAY have just seen the start of the 2^nd wave of Tsunami or very strong signals that we are not too far away from it, rather than just any normal correction. I am not saying that the stock market is going to straightaway collapse from here, it may rally along the way and people should be selling into rallies, rather than buying aggressively into the market. If the market slides further, it will be a good time to start doing short-selling to ride the downtrend. Precious metals, like gold and silver are also good instruments for us to protect our wealth and hedge against inflation, which is slowly showing its ugly face.

Above is just my personal view and I have to admit that I may be wrong! I would rather be cautious and defensive now than to be an aggressive buyer into the market. The downside risk is much much higher than the upside potential at this point of the time. Please be careful!

Disclaimer: Please be informed that the above mentioned stocks/indexes/investment instruments are solely for the purpose of education; it is NOT a recommendation or an invitation to trade/invest. For trading/investment advice, please speak to your remisier, dealer representative or financial adviser. Please understand that there is risk in every trade/investment venture, know your risk first before you venture into any of them.

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Michael Maloney :The Tipping Point is Upon Us!!

The tipping point is upon us!

A “tipping point” in sociological theory is defined as “the level at which the momentum for change becomes unstoppable.” An idea or a movement has reached “critical mass.”

I believe the global economy has reached that point.

During my travels, one of the most remarkable phenomena I have observed is the extent to which the people of the world have been transformed, in the course of a generation or two, into investors.

This tipping point corresponds to the beginning of the second phase of the current bull market in gold and silver. In almost any bull market throughout history, the second phase of the cycle, when the public really becomes aware a bull market is occurring, is the longest phase in duration and also the phase when the greatest gains are made.

Over the past year I have had the privilege to take part in various speaking tours in numerous countries throughout Latin America and Asia-Pacific. During my recent partaking in the first Silver Summit in Singapore I had a strong sense that the second phase of the greatest gold and silver bull market in history is beginning. Here’s why:

Never before in history have all the world’s currencies been fiat currencies at the same time. Remember fiat currencies are established by government decree and have no intrinsic value. Because every currency in the world is a fiat currency, there is no place to run to protect your wealth against government confiscation by continuing to print more and more currency—nowhere to run, except to gold and silver.

The same phenomenon exists, everywhere in the world. The number of Australian dollars in existence has multiplied 180 times since 1960. There are 389 times more Taiwanese dollars in existence today than there were in 1962. Every government in the world is pursuing the same policy of currency debasement—and as a result—there is more than 10 times the currency circulating world-wide than there was in the 1970’s.

Here’s another big change between then and now: In the 1970s, during the last great gold and silver boom, 90 percent of the global population had no way of participating in the bull market. That’s because in the Communist Soviet Union and in Mao’s China, no markets existed, and there was not a single individual investor among those enormous populations. It was only America and Western Europe that drove gold and silver prices to their stunning heights.

This time around, the world is very different: there are billionaires in Russia, China, India, South America—every continent (except Antarctica) has its billionaires. The richest man in the world, Carlos Slim, lives in Mexico City.

Today, there are 10 times more people on the planet who have the freedom and the means to chase the next big thing, driving up market prices in the process.

Not only are there 10 times more people with the ability to participate in the market, there are somewhere between 10 and 100 times more people today who have an investment mentality than in the 1970s. Back in those days, before Nixon took us off the gold standard, people were savers. You could go to work in your teens or early 20s, save 10 percent of your income each month, and by the time you were in your 60s, you could retire and live the rest of your life off the interest on your savings.

That saver mindset evaporated the second Nixon ended the gold standard. From that day on, if you planned to enjoy your retirement, you were forced to become an investor or a speculator. The NASDAQ tech bubble of 1999 turned everyone into a day trader. The real estate bubble turned everyone into a flipper. Today, I hardly know anyone who doesn’t have an investment mentality.

This philosophical shift didn’t just occur in the United States; it happened everywhere. In modern China, investing is a sport, and Shanghai has its own riotous stock exchange.

And with the explosion of deficit spending and fiat currency creation, all over the planet, the next great bubble is destined to be precious metals. As people rush back to gold and silver to protect their wealth, they are going to drive precious metals into a bull market the likes of which the world has never seen. Those on the right side of the bubble will profit immensely.

The 2010s will be an exciting decade. For years I have been saying we have been presented with the greatest opportunity in the history of humankind, because global economic conditions are setting up the greatest transfer of wealth in history.

So, in a nutshell, in the gold and silver bull market of the 2000s compared to the metals bull market of the 70s, you have 10 times more people able to invest, of whom 10 to 100 times more possess an investment mentality and ready to pile onto the next big thing, and there’s 10 times the money (currency) in existence.

A critical mass of world investor’s are recognizing the unsustainable nature of the fiat system. And the second phase of this bull market is beginning right now.

The tipping point has been reached!

Source: GoldSilver.com

Disclaimer: Please be informed that the above mentioned stocks/indexes/investment instruments are solely for the purpose of education; it is NOT a recommendation or an invitation to trade/invest. For trading/investment advice, please speak to your remisier, dealer representative or financial adviser. Please understand that there is risk in every trade/investment venture, know your risk first before you venture into any of them.

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Warren Buffett’s Top 10 Investing Tips

Below is Warren Buffett’s top 10 nuggets focusing solely on his area of unquestioned expertise – investing, NOT trading:

1. The Snowball 
Buffett’s definitive biography, “The Snowball,” is titled so because it sums up his life in two words. Over everything else, Buffett believes in the power of patiently compounding over time. In investing, that means starting as early as possible (he started as a pre-teen), avoiding short-term risks even if it means lower possible returns (rule No. 1: never lose money), and letting investing returns build upon itself.

 

2. The concept of a “moat” 
Buffett looks for companies with moats, or sustainable competitive advantages. The strength of Coca-Cola’s moat (its brand) is why he believes a ham sandwich could run it. The stronger a company’s moat, the more likely it will be a leader for decades rather than years. For examples, see some of the other companies Berkshire Hathaway owns a significant stake in: Johnson & Johnson, GEICO, Procter & Gamble, and Wells Fargo.

 

3. “Leverage is the only way a smart guy can go broke.” 
Buffett believes debt is dangerous. That’s why you can have banks rife with Harvard MBA’s (hello, Goldman Sachs and JPMorgan) that are always a few days away from bankruptcy via a crisis in confidence.

 

4. The concept of inner scorecard vs. outer scorecard 
“If the world couldn’t see your results, would you rather be thought of as the world’s greatest investor but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were actually the best?” Those who answer the latter have an inner scorecard. They’ll have the ability to be a true contrarian, ignoring the world’s judgment and focusing on long-term results.

 

5. “Intensity is the price of excellence” 
When asked what the most important key to his success was, Buffett answered “Focus.” Microsoft founder Bill Gates answered the same way. Buffett reached his current heights not only because of his brilliant mind, but also because of a focus that has had him analyzing stocks for hours on end, just about every day, for decades.

 

6. A stock is the right to own a little piece of a business 
Buffett’s mentor Benjamin Graham’s idea. We frequently divorce a stock from its underlying company, especially when Mr. Market is delivering up a volatile stock price. Remember, though, that in the long run, a stock is only as good as the company backing it up. Kind of like how a promise is only as good as the person making it.

 

7. Don’t fall into the false precision trap 
“We like things that you don’t have to carry out to three decimal places. If you have to carry them out to three decimal places, they’re not good ideas.” It’s important to keep the big picture in mind. A 20-tab Excel model that calculates a company’s value on a discounted cash flow basis is useless unless you understand the business enough to feed in good assumptions. When Buffett made a killing on PetroChina earlier in the decade, the mispricing was so obvious that his only due diligence was reading its annual report. Not recommended for mere mortals, but you see his point.

 

8. “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” 
Remembering the Buffett concept of an inner scorecard, and the Rudyard Kipling admonition to “keep your head when all about you are losing theirs,” can lead to outsize returns as Mr. Market sways back and forth.

 

9. Margin of safety 
As with many of his most beloved tenets, Buffett got this one from his mentor, Benjamin Graham. A margin of safety simply means buying in at a price well below your best estimate for a stock’s intrinsic value. In other words, don’t just buy names like Visa and Johnson & Johnson because they are great companies with strong moats. Go the extra step, and only buy them when they are great companies selling for good to great prices.

 

10. “A ham sandwich could run Coca-Cola.” 
Believe it or not, that’s a compliment to Coke. It speaks to why it’s Berkshire Hathaway’s biggest stock holding. As Peter Lynch put it, “Go for a business that any idiot can run — because sooner or later, any idiot probably is going to run it.”

 

Source: Motley Fool

Disclaimer: Please be informed that the above mentioned stocks/indexes/investment instruments are solely for the purpose of education; it is NOT a recommendation or an invitation to trade/invest. For trading/investment advice, please speak to your remisier, dealer representative or financial adviser. Please understand that there is risk in every trade/investment venture, know your risk first before you venture into any of them.

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