The Warren Buffet philosophy of investment

1) markets are not rational. Share performance will be more volatile than company real performance. Share price is most widely tracked but least useful. Book value is not accurate reflection on company's ability to generate profit.

2) strong opponent of emh. If you are so smart why am I so rich. William Sharpe. Outperformance of market is a sigma event. It is easier to explain a sigma event than explain gaps in Emh. Opponent of capm (unrealistic assumptions )and technical analysis (not reproducible)

There is poor autocorrelation in prices and technical analysis should fail. There is no way to reproduce results reliably. Flip a chart over and the results are not reproducible

3) Business schools and markets reward complex behaviour more than simple behaviour. But simple behaviour is more effective. Strongly prefer simple business with predictable results.
If you can't explain why you want to make an investment, don't do it. Invest within your circle of competence.

If results are influenced by one factor and there is 90% probability of it happening, probability of success is 90%. If results are influenced by 10 factors and each has 90% success of happening, success overall is 35%.

Invest in simple business such that mismanagement have minimal impact. Strategic management mistakes are likely if business is complex. (hawkers are good investments)

4) Oppenheimer, Lakanishok Modern research revealed investing in low p/bv, p/e, p/c, higher div/p brings excess returns.

Fluk, malkiel, and quant thesis on not buying the cheapest stock (dire fundamental issues nearing bankruptcy ) but the second cheapest (just undervalued at the moment)

5) Moats are difficult to define. A lot of constraints become variable over time and moats eroded over time.(barriers of entry, patents, technology, materials, demographics and different tastes and preference )  Evaluate companies in your portfolio based on fundamentals and be prepared to ride out years of structural change and stock price underperformance

6) When buying companies based on network externalities (facebook, newspapers) buy only the largest company as they attract the widest usage and attract largest advertising revenue. What's already strong will stay stronger. Buy companies that actively influence the impressionable young and they will stick to you once you capture their loyalty (Milo, marvel, X -men, avengers,)

7) Mathematical models (ltcm, black scholes model) and overreliance on stability of financial constants / variables are folly and correlations can converge in times of market stress. Fat tail instead of normal distributions. These models are good as predicting normal circumstances but fail at predicting periods of stress or black swans.

8) Always try to manage a high level of liquidity to buy at discount levels and have sufficient funding to survive creditors and portfolio shocks. Anything can happen in stock markets and your strategy is to be operational such that even in extraordinary circumstances, you can survive and react to it

9) Have a long term horizon for the fundamentals to work itself out. I'd you can't hold the stock for 5 years don't hold it for 5 mins. Buy and sell due to change in fundamentals and not based on time.

10) Buffet highly contrarian viewpoints, to develop truly independence of opinion rather than follow the flow. Be fearful when others are greedy and greedy when others are fearful. Develop self control and self confidence to have an opinion in falling markets and great times of uncertainty. To be disciplined and act within the self controls you set for yourself.

Comparision with other fundamental analysts

Benjamin Graham
Graham Statistical analysis of stocks to filter undervalued stocks, merely means it is undervalued, and company can continue to go bust. Important to use qualitative factors

Graham emphasis on treating stock as an ownership in a business. You must like the way the company is run and has a positive outlook before entering into it. Integrate the views of a investor and a businessman to properly evaluate how well the company is run. You are a business analyst, not a security analyst, market analyst, macroecononist. Know what you are doing with your business.

Speculation is just buying / selling in expectations of changes in prices. Investment is buying / selling based on understanding of its business and its value

Only buy stock if a reliable calculation demonstrates it has a good chance of returning a reasonable profit.

Stay away from ventures whereby you have little to gain and much to lose. Rationalise decisions based on quantitative and not optimistic feelings. Gain evidence that you are not risking substantial part of capital especially if return is limited.

Utilise tools to monitor manager performance, unless you have specific reasons to trust his integrity and ability.

Highly focused on the Quantitative, Invest in business that has significant margin of safety. Market price must be significantly undervalued compared to intrinsic price. Must have a discount to fair value. Focus on statistical numbers such as selling price, earnings, assets, dividends. Buy stocks as if they are groceries and not perfume

Shy away from qualitative aspects and historical performance and one cannot guarantee what the future can hold.

It is important to generate independent thought and strong character. Know when to trust ones knowledge and experience, and have the courage to act on one's judgement. Stock market in the short run is a voting contest and participants are not necessary qualified. You are not right or wrong because the crowd disagrees with you. You are right because your data and reasoning is right.

Earnings / price >high grade bond i/r .Since stocks are riskier than bonds, expected return from stock must be higher than bond i/r
E/p>rf
E(R)>(rf+g)
Search for low p/e stock
Evaluate intrinsic price by discounting cash flow at risk free rate. Then ensure that price bought is way below intrinsic price.
Pay no more than 15 times earnings for good companies,
p/e <15, p/bv<1.5, p/e*p/bv<22.5
Company must have more than 2bil in revenue, ca 2 times larger than cl, long term debt lower than net current asset or working capital, company profitable for past 10 years, consistent dividend policy, annual profit growth around 3%
Very conservative approach in lieu of the Great Depression

Special emphasis on evaluating cyclical companies. Never buy low quality securities in favourable conditions. Prosperity is not a margin of safety. Shy away fron growth stocks that promise too much but not necessary deliver. But and sell in accordance to assigned price levels

Diversification is an old school principle of conservative investing. Emphasis on quality of portfolio and buy at undervalued price rather than make diversification a goal. If market level is high you are not diversifying anything.

Philip fisher (focus on growth stock)
Common stock and uncommon profits

One need not only buy growth stock to be successful in investing. Value approach works well too. but growth companies deliver in both capital appreciation and dividend yield.

Bet on growth companies with a established operating history and not young fledglings. They have experience in managing losses in downturns compared to younger start-ups. Strongly favour technology companies.

Growth stock can grow further. Just because company is not undervalued in accordance to historical data, doesn't mean it is not undervalued in accordance to future prospects.

A stick that went up doesn't use its upside potential. If investor truly invest in exceptional companies, they function at a different level and this argument doesn't hold. A good company can simply continue to grow (think Coca Cola, McDonald's, apple, creation of blue markets).if you buy a great growth stock at a undervalued price you should never sell it.

Selling your stock when it is high,  waiting for markets to fall then buy it back, is ridiculous. getting your bait back is psychological comfort rather than rational decision. Whether a stock is good or bad doesn't depend on your emotions but the company performance.

You can bet on business cycles, and buy at low and sell at high. But you are taking much more risk and not necessary higher return. It is difficult to forecast macroeconomic and financial indicators, market dynamics. It is only possible to identify whether there is dominant speculative buying and onset of economic storms warnings (think China)

5 year time horizon. Statistics bargain hunter whom buy and sell frequently earns less than holding on to well managed growth companies.

Never trust market talk and the obsession of the market in random trends and hot stock valuation. People can irrationally overestimate prospects of an industry. You can be paying for a misrepresented view of a stock. Don't follow the crowd and don't compare your views with the majority. Efficient market hypothesis does not hold and the market does not decide what is right or wrong.

Companies evolve over time. Coca Cola has processed beyond growth stage as it has expanded all existing markets. Changing consumer preference to healthier food and government regulation exist as real threats. Glocalised products and strategies can be adopted across different markets, and product range will vary across time. Climate change impose threats to production inputs (water) ,and it might not be able to capture market share of gen y and z.

Fisher 15 principles
1) Products and services that has sufficient market potential, to provide increase in sales for several years

2) product development pipeline that can increase future sales if current products growth potential is exploited

3) effective R and d ,well functioning sales, worthwhile profit margins, substantinable and growing profit margins, long term outlook with regards to profits, outstanding labour and personnel relations, ability to finance growth with good judgement

4) ability to ensure its profit margin cannot be eroded or threatened. If inflation or threats set in, it must be able to increase its price and not resort to absorbing losses or threatening profit margin.

5) have a niche in goods and services provided. If competition is building  new production capacity, increase in supply will make it difficult to pass in costs to consumers and profit margins drop.  - comfort is definitely not a good stock

6) inflation is a real threat. Inflation erodes money that is being hoarded and not utilised to boost profits. It consumes undistributed profits and accumulated amortisation (non cash depreciation in value of assets).

7)Heavy emphasis on noting changes in consumer preferences. You may incur expenses on assets that does not contribute to company bottom line.

Companies buy air conditioning to suit consumer tastes. Buying these assets do not improve sales turnover if everyone is doing it.  - comfort is definitely not a good growth stock!

8) After initial growth stage, company must transit to a stalwart stage and start paying dividends, as company cannot grow forever. Dividends are a sign that company can sustain and develop business without consuming all of its profit

9) Diversifying is a lazy man method of risk management. The important issue is finding good investments, not finding large number of suitable opportunities to buy. Gain in depth knowledge of company to reduce risk than playing the numbers game to diversify risk

Buffett
Never invests in business you cannot understand
Focus on business that are simple to manage
Focus on convertible bond rather than stock if considerable risks are present.
Strong integrity valued in choice of managers
Better to buy a great company at a fair price than a fair company at a undervalued price. One have limited capital.

Use qualitative methods to gauge health of company. Use historical figures to project future prospects. Investing is clearer when looking at the rear mirror than the windshield.

Use bond rate as risk free rate
Annual return must be beating market by 5%
No usage of capm. If I hold the stock forever risk does not depend on volatility on market price (beta). Beta is intrinsically unstable
Focus on depth of knowledge in industry and company. Don't trust market valuations and short term views of the market.
Don't buy the cheapest but the 2nd cheapest stock
Purchase price must be low such that acquisition is profitable even if sales prospects are poor.
Shun away from technology companies
Deliberately price purchase rather than tine purchase. Use your clout to improve negotiating power.
Buffet dislikes dividend payout and prefers capital growth. If I can manage the money better and grow the company, reinvesting money back rather than dividend payout is preferable.

Buffett hit list Gillette, Coca Cola, McDonalds, procter and gamble)
1) Business that can deploy large amount of incremental capital at very high rates of return. (Very hard to achieve as most high return capital need relatively little capital) Buffet buying over such companies and acting as a lender / bank to them to let them fulfil their potential.
2) Between 2 wonderful business, choose the company which is less capital intensive.
3) Choosing business that had long term prospects with honest management
4) if there is a dilemma between great management and subpar outlook of company, look at the company outlook as management need not fulfil their potential and star managers can fall off. Choose companies with investment moats with competitive advantages
5) Porters 5 forces. Go for companies with franchises and brand names. Exploit product differentiation and experiences that a shop can bring (apple, Starbucks). Franchises are branding + differentiated products and services with no close substitutes + enduring goodwill + minimal tangible assets + product development + consumables + distribution power
6) Choose companies that are simple to run so that impact of mismanagement is minimised
7) Utilise companies with network externalities and can achieve economics of scale (supermarkets )
8) Look for a company with strong and consistent operating performance. It can continue to do what it is doing and perform for next 10-20 years, with increased scale (vicom and newspapers are out).
9) evolving investment strategy. Purchase of IBM as it is a service company instead of technology company

Buffett banlist
1) business that consistently deploy ever increasing amounts of capital at very low rates of return
2) companies with commodity products and substantial overcapacity (porters 5 forces)
3) avoid perfectly competitive markets in highly competitive industries. If a cost reducing measure can be replicated by rivals, companies that do not do so are worse off. Companies that do so, and have their methods replicated by rivals, only enjoy short term profits. Ultimately these companies cannot be very profitable. Great amount brainpower and energy cannot compensate for the state of things.
4) Avoid technology companies as they are too untested and unproven and it is too difficult to value them
5) Do not invest in industry trends. There will be many collateral damage amongst the last few emerging winners. Focus on the company and not the trend. Bottom up analysis.
6) Focus in minimising bad investments instead of gaining in one next level investment. It is the strongest swimmer that drown. Use compound interest to make gains over long time horizon.

Peter lynch
1) stocks have simple minded behaviour. Focus on the company and not the stock. Price is the most widely tracked and the least useful.

2) Stalwart (dividend) , cyclical, growth, turnabouts,

3) Just because a stock is cheaper is no reason to buy, and a stock more expensive is no reason to sell. A penny stock can transit to a normal stock and blue chip collapse to Penny levels.

4) Favours company in a Monopoly position. Look for the strongest companies in dismal industries. Favour companies that are overlooked and let time and fundamentals run its course.

The weak drop out and the stronger will take over the gap. It is better to get a company that captures increasing share of market in dismal industries, then struggle to protect dwindling share of exciting market. Total domination is healthier than domination

5) Avoid technology companies in hot industries as their existing products are at high threat of beingade obsolete. Company can lose half it's value overnight when rival unleash better product

6) Focus on companies with high growth rate but ideally lower pe. Stock should sell at or below the growth rate of earnings.

7) High growth rates are not sustainable and will eventually taper off to stalwart stocks. It will either self destruct or diwosify

8) Focus on simple business to avoid mismanagement. Buy within your circle of competence.

9) choose companies that are not dependent on constant capital  reinforcement to stay afloat. (high costs of business, requires raising of debt / equity to sustain business)

10) Prefer consumer sector to cyclical, turnabout and technology companies. Those companies can have Huge growth rate but also less risky. Those companies are easier to monitor (day to day) and consumer preference will not change overnight just because rival has superior business model.

Cyclical companies require very in depth understanding of commodity prices and cycle to make money. A plumber will be a better stock picker than a MBA .Highly dependent on macroeconomic conditions which are unpredictable. Simpler (and easier) to do a bottom up than a top down.

11) Choose companies that are not well known and find undervalued opportunities.

12) Never buy start-ups that overpromise too much, potentially deliver too little, and have no historical confirmation of good results.