Portfolio Size
1. Warren Buffett is a “Focused Investor” investing only in companies which he considers outstanding. His portfolio consists of much fewer stocks compared to fund managers who manage a similar portfolio size.
2. Peter Lynch had to manage a huge portfolio of stocks – more than 1000 shares. In page 239 of his book, he says that it’s best to own as many stocks as there are situations in which (a) you’ve got an edge; and (b) you’ve uncovered an exciting prospect that passes all the tests of research.

Buy Criteria
1. Warren Buffett makes investment decisions primarily using valuation – he buys good businesses/shares where the market value is less than the “intrinsic value”, a figure he appraises using his discounted cash flow model.
2. Peter Lynch buys shares using a number of different approaches, looking at PE ratio, cash position, relative valuation against market, looking at whether you have an “edge” in the industry etc. He even categorizes companies into 6 types and determines how you should approach each type of investment.

Holding Period
1. Warren Buffett says: “our favourite holding period is forever”.
2. Peter Lynch buys and sells his shares. I do not believe he has any hard and fast rules as to minimum or maximum holding period.

Market Fluctuations
1. Warren Buffett is not concerned about market fluctuations at all.
2. It doesn’t say anywhere but I guess Peter Lynch, being a Portfolio Manager needs to consider things like performance benchmarking and negative investment returns.

Risk
1. Warren Buffet’s concept of risk is that the lower the share price, the lower the risk.
2. Interesting Peter Lynch does not address the issue of risk much in his book.

The Economy
1. Warren Buffett ignores the economy when making investment decisions.
2. Peter Lynch takes the view that it is more or less impossible to predict the economy, but he does say that “practical economists are economists after my own heart”, for example “those like Ed Hyman at CJ Lawrence who looks at scrap prices, inventories, railroad car deliveries.” I believe Lynch considers some indicators to be important too.

Comfort Zone
1. Warren Buffet stays away from tech stocks generally, things that he does not understand.
2. Peter Lynch seems to be more open saying that he discovered some of his best stocks through eating and shopping. In fact in Page 11 of his book, he describes how he missed out on the Amazon.com opportunity even though the company was easy enough to understand. He admitted that he was not flexible enough to see the opportunity in its new guise.

As you can see both Buffett and Lynch are very different investors, yet both have outstanding track record. I believe the lesson here is that you can still develop your own investment style which works for you.

Our market in Bursa Malaysia is very different from Wall Street. For example, utility companies which may be deemed safe in western countries are sometimes subject to political whims and fancies in Malaysia. Yet many of the IPPs and other utilities have huge borrowings. I guess time will tell whether such utilities can be considered a “safe investment”.

Notably she made lots of money by investing and holding on to a pharmaceutical stock called Schering Plough. From what I read, she has never sold a share… just kept holding on and buying more.

What? Buy and Hold? “That’s just not for today’s market!” … I hear you say.

Maybe so.

Last night while watching CNBC, I heard a commentator say that US stocks are trading lower now than they were 10 years ago. That includes many of the big blue chips.

I haven’t held stocks for that long, but the ones I’ve held for 3-4 years are mostly out of the money… which means I’m sitting on paper losses. So in hindsight, should I have sold 6 or 12 months ago?  Sure… but you know what they say about hindsight right?

I’ve always held the view that short of the divine, it is impossible to time the market.

Meaning that you never know when the market has peaked and when it has hit rock bottom. So why try to time the market at all? Just decide that you want to be an investor for your Life Occupation and don’t even think about quitting your job!

“When times are good, be happy; but when times are bad, consider: God has made the one as well as the other.”
Ecclesiastes 7:14 (NIV)

But having said that, I’d agree that for most people, Buy and Sell is better than Buy and Hold.

In his book Even Buffett Isn’t Perfect, author Vahan Janjigian suggests that “unless you have access to Buffett-like resources, it is better to think of yourself as a stock buyer than a business buyer.”

See unlike Buffett, I can’t afford to buy the entire company and totally ignore the share price. In contrast, if Buffett feels that Mr Market is being foolish, well he can just buy the whole company right?

There’s a big difference when you can afford to buy the whole thing. Think about it… if you bought a house and someone comes along tomorrow and tells you it’s worth 30% less, would you listen to him? You’d probably tell him to fly a kite wouldn’t you? You’ve bought the house, you can afford to pay the bank loan, you can afford to keep it for the next 10 years and you know it will go up eventually. So why listen to Mr Market?

But hang on, what about Anne Scheiber? She doesn’t have Buffett-like resources – yet Buy and Hold has worked for her!

Buy and Hold is Fantastic

… if you can pick wonderful companies and have an investment horizon of 40 years.

Both Warren Buffett and Anne Scheiber have been investors for more than 40 years.

Anne Scheiber invested in businesses that she knew and understood. She loved the movies. And she invested in Columbia, Paramount and so on. She was a Coke/Pepsi drinker and she had shares in both. She took medication, so she invested in Schering Plough and Bristol Myers Squibb.

Actually if you believe Peter Lynch, picking the right stocks is not beyond the normal person:

“Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks as well as, if not better, than the average Wall Street expert.”

Oriental Holdings Berhad – What if You had Bought and Held?

I happened to be reading the Annual Report of Oriental Holdings Berhad (ORIENT) the other day and came across a statement by Chairman Dato Loh Cheng Yean:

“A holding of 1,000 stocks in Oriental when it was listed in 1964 would translate into 40,255 Oriental stocks worth RM263,670, based on the share price of RM6.55 at the end of 2007. In addition the stocks would have earned a total gross dividend of RM137,660. The gross dividends received and the appreciation in value is equivalent to a remarkable average rate of return of 14.60% for each of the 44 years.”

This sounds pretty good… see once again we’re talking 40 years. I find Oriental Holdings to be quite “remarkable” because it is such a diverse collection of different businesses which include auto assembly, auto parts manufacturing, oil palm, hotels, property etc. But 85% of its RM498 million Operating Profit is from auto and oil palm.

Oriental Holdings Bhd (ORIENT)

In the 4-5 years after the 1997 crash, Oriental’s earnings were down or at best flat, then since 2001 it started taking off and the company became a cash cow, building its Net Cash position to more than RM1.3 billion as at end-2007.

Oriental Holdings is a low profile company. I remember that I mentioned this company to a friend casually over dinner one night and she’s never heard of it. And this was no ordinary friend – she’s a Fund Manager & Analyst.

But if you had bought and held on to this company since listing, you’d be pretty happy.

The Warren Buffett Way (by Robert Hagstrom)

“Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to missappraised.”

Legendary Investor Warren Buffett never wrote any book of his own, but his ideas and investment tenets are well summarized in this book. The book traces Buffett’s investment education and the people who have made an impact on his life including his teacher Benjamin Graham and his partner Charles Munger. It looks at some of the key tenets held by Buffett on value, management, business operations and finance. From this we learn to apply Buffett’s techniques to identify good companies to invest in.

Importantly there is a chapter called “The Psychology of Money” which teaches you the correct temperament if you want to be a good investor. True investors are said to be calm, patient and rational and we all know this is easier said than done. A key message in this book is that Warren Buffett is a Focused Investor, preferring to make significant investments in fewer places rather than having a highly-diversified portfolio.

“I can’t be involved in 50 or 75 things. That’s a Noah’s Ark way of investing-you end up with a zoo. I like to put meaningful amounts of money in a few things.”

One Up on Wall Street (by Peter Lynch & John Rothchild)

“The person that turns over the most rocks wins the game. And that’s always been my philosophy.”

Peter Lynch managed Fidelity’s Magellan Fund from 1977 to 1990, during which time the fund grew from US$20 million to US$14 billion. One Up on Wall Street is very different from The Warren Buffett Way but is nevertheless a wonderful book. When you have to manage a portfolio with more than 1000 stocks, the game gets more complicated and Lynch is the master. He talks about his case studies with passion, the mistakes he made, the “ten baggers” (stocks that have gone up 10 times), how to find the perfect stock, the things to avoid and the signals which can provide you with an edge over the market. Interestingly Lynch identifies 6 types of companies to invest in: Slow Growers, Stalwarts, Fast Growers, Cyclicals, Turnarounds and Asset Plays. He provides good guidance on the best time to sell each type of stock.

“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.”

Besides these two books I also read a whole bunch of Annual Reports (yawn) and hopefully I’ll get to share my observations with you from time to time.

And of course, the most important book of all: The Bible

Whaaaat? What has that got to do with Investment? I hear you ask.

My answer is everything.

THE HOLY BIBLE

Dishonest money dwindles away, but he who gathers money little by little makes it grow.
Proverbs 13:11

For me the most important investment lessons are found in how we can overcome greed and fear. We may have all the techniques and strategies but if we do not know our true enemy the game is lost. Right now we are seeing a financial collapse in the US and I think most people would agree that this tragedy has been fuelled by greed.

God teaches us numerous lessons about money, in fact I had to lose a whole lot of money and learn the hard way. But looking back it was perhaps one of the greatest blessings in my life. Money is a tool that God uses to help us grow spiritually.

Whoever loves money never has money enough; whoever loves wealth is never satisfied with his income: Ecclesiastes 5:10

Doesn’t sound too impressive to you? Well think twice…

21.1% per annum compound means that if you had invested just one dollar in 1964, your buck would have grown to $4553 by 2007! Page 3 of the Annual Report says:

“Over the last 43 years (that is, since present management took over) book value has grown from $19 to $78,008″

(By the way, the 21.1% is after tax!)

So now you can see why Warren Buffett is easily the Richest Man in the World.

Still think it is realistic to target 30% return per month on Bursa Malaysia?

In fact I say that it is nearly impossible for anyone to repeat what Buffett has achieved. One thing to note is that Berkshire has achieved its growth not just from stock market investments but in buying controlling stakes in many businesses. This makes him different from other money managers… and also different from other business owners. His unique approach makes him both an outstanding fund manager and business owner at the same time.

Look at Berkshire’s Balance Sheet as at 31 December 2007 and you will see that Equity Securities amount to US$75 billion or just 27% of Berkshire’s total assets of US$273.2 billion.

The rest of the assets comprise fixed income investments and the businesses which Buffett has acquired over the years. These are businesses in industries which include utilities, energy, retailing, manufacturing and services.

This means that the value of much of Berkshire’s assets is not subject to stock market vagaries. As long as his businesses are performing, Berkshire will do well no matter what the stockmarket does.

Click to enlarge
Source: Berkshire Hathaway Inc - 2007 Annual Report

On 16 October 2008, the New York Times published an op-ed letter contributed by Warren Buffett. The message of the letter was clear–Buffett is a buyer of US stocks.

In the letter, Buffett offers a few words of wisdom which has made him perhaps the greatest investor of all time.

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”

Buffett says that people who are high in cash have opted for a “terrible long-term asset”. Personally Buffett is planning to move towards 100% in US Equities.

“If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.”

Buffett draws some analogies between previous recessions/depressions and how the stockmarket usually runs ahead of the economy. When we look at the carnage even in Malaysia, it does make sense. Fundamentals have not changed much except that we are looking at a global slowdown which will affect us somewhat. However liquidity is ample, exports are stable, ringgit is low and interest rates are low.

“In short, bad news is an investor’s friend.”

So what Buffett said can be equally applied to Malaysia!

You can read more about the article here:
http://www.nytimes.com/2008/10/17/opinion/17buffett.html