If you know the company name Berkshire Hathaway you likely have heard about Warren Buffett. Warren has a partner and you can find some interviews of You Tube and his name is Charlie Munger. The fact that both men are billionaires means that everyone want to know how did they earn their billions? what process do they follow to invest? One of the secrets is to own a company that generates lots of free cash to invest in ie an insurance company. Warren Buffett always keeps lots of money in cash or cash equivalents waiting for the market to decline before he buys.
Charlie Munger studies the markets for years before loading on select stocks at good prices – have patience and wait. After he buys the company, he waits for decades before considering selling them.
Often he suggests investors should stick with diversified low fee index funds and begin to buy as many share as possible in companies you know a great deal about and hold them for as long as possible. If you work for a company which offers shares and you expect it to be in business for the next 20 years, that is a good thing to participate in. You are in the industry, you should know something about it. If you are going to concentrate on stocks, ensure you have simple metrics to ensure they are worth holding for 20 years – profits, free cash, increasing dividends over the years, low debt, good management and who are the customers. Why are they coming back year after year to buy their goods and services over the competitors.
The problem with concentrating on a few stocks is you tend to do very well or very poorly. Warren Buffett owns Coca-Cola which is good; (Jim Cramer likes Pepsi Co better, but Coke is good) Wells Fargo which over the past three years has not performed well but it should do better. (it is on my watch list).
Norman Rothery of StingyInvestor.com demonstrated in an article diversification is a good thing for investors because if you are over concentrated in one industry or one group you will be subject to the whims of the market. A couple of years ago, the market loved companies taking on debt to buy back stock; this year the market does not like too much debt. The moods of the market changes and the risk reward changes.
Diversification tends to be 20 to 30 stocks, because the only perfect information is when the market closes. No one knows what happens when the market opens, somebody has a theory and tries to connect the dots to a different theory and it begins to make the rounds and what was popular is no longer until in does not work.
Linking to dividend paying stocks, in the market you will not be in every rally, somebody will be making more money than you, someone will be losing more money than you. If you have the bulk of your assets in dividend paying stocks, the stocks over the years will do well and you are rewarded because they make money or profits. One of the important elements when doing investing is try not to lose money. It is much easier to lose money than make money. It is much easier to overpay than underpay. It is much easier to jump in on a trend only to see it go away. The trick is patience, trying to think long term and realizing you can have some of the dividends go into an account that plays the hot stocks, the rest and bulk of your assets are protected by profits.
There are more questions than answers, till the next time – to raising questions.