THISBOOKREPRESENTSTHEAUTHORSVIEWWITHOUTANYOFFICIALCONNECTIONTOWARRENBUFFETT

INVESTMENTLESSONS

LEARNTFROMWARRENBUFFETTCENTURY

EDUCATION

21ST

BYJAMIEMcINTYRE

INVESTMENTLESSONSLEARNTFROMWARREN

BUFFETT

ByJamieMcIntyreFirstpublishedSeptember2012

Publishedby21stCenturyPublishing

Level9,222KingsWay,SouthMelbourne,Victoria,Australia3205

Phone:1800999270Fax:(03)84565973

NZFreeCall:0800893302FaxNZ:(09)3587340

Email:enquiries@21stca.com.au

Web:www.21stcenturyeducation.com.au

www.21stcenturypublishing.com.au

Copyright2012,21stCenturyPublishing

Allrightsreserved.Nopartofthisbookmaybereproducedor

transmittedinanyformorbyany

means,electronicormechanical,includingphotocopying,recordingorbyanyinformation

storageandretrievalsystem,withoutpriorpermissioninwritingfromthepublisher.

NationalLibraryofAustraliaCataloguing-in-Publicationentry:

McIntyre,Jamie

InvestmentLessonsTheWorldCanLearnFromWarrenBuffett

ISBN978-1-92-458-48-4

PrintedandboundinAustraliabyGriffinPress

ForWholesaleDiscountsorReorderse-mail

enquiries@21stca.com.au

21stCenturyEducationHoldingsPtyLtd

Level9,222KingsWay,SouthMelbourneVIC3205

Phone1800999270Fax(07)35039021

Mail:POBox352,TewantinQLD4565

Disclaimer-ImportantInformation

Thisinformationhasbeenpreparedtoprovidegeneralinformationonly.Itisnotintendedto

taketheplaceofprofessionaladviceandyoushouldnottakeactiononspecificissuesrelying

solelyonthisinformation.Inpreparingthisinformation,wedidnottakeintoaccountthe

investmentobjectives,financialsituationorparticularneedsofanyindividualperson.

Beforemakinganinvestmentdecision,youneedtoconsider(withorwithouttheassistance

ofanadviser)whetherthisinformationisappropriatetoyourneeds,objectivesand

circumstances.

OtherbooksbyJamieMcIntyre.

The21stCenturyPublishingrange

ofbooksbyJamieMcIntyreincludes:

WHATIDIDN'TLEARNATSCHOOLBUTWISHIHAD

WHATIDIDN'TLEARNFROMMYFINANCIALPLANNERBUTWISHIHAD

WHATIDIDN'TLEARNFROMGOOGLEBUTWISHIHAD

WHATIDIDN'TLEARNFROMMYFINANCEBROKERBUTWISHIHAD

THINKANDGROWRICHFORTHE21STCENTURY

TIMERICH-Howtohaveamillionairelifestyleinside12monthswithoutneedingtobecome

one

101LESSONSTHEWORLDCANLEARNFROMSTEVEJOBS

101LESSONSILEARNTFROMRICHARDBRANSON

WHATIDIDN’TLEARNFROM

MYREALESTATEAGENTBUTWISHIHAD

INVESTMENTLESSONSTHEWORLDCANLEARNFROMWARRENBUFFETT

101WAYSTOIMPROVEAUSTRALIA

ContentsForeword

1.THEORACLEOFOMAHATheUltimateInvestor?BerkshireHathawaySharePriceGeicoBenjaminGraham

Buy,notonoptimism,butonarithmeticSomeBuffettWitEthicsPersonalTransportationBuffettandMungeronMathematicsandTheories

2.WOODSTOCKFORCAPITALISTAMessagefromYourChairman

ShoppinginOmahaAnInsider’sImpressionofthe2012WoodstockforCapitalistsbyBerkshireHathawayDirector,BillGates.TheChairman'sLetterSomeBuffettMusingsfromHisChairmen’sLettersandAnnualMeetingsBuffettat5am

3.THEBUFFETTINVESTMENTSTRATEGYWarrenBuffett'sShareSelectionMethodologyHowBuffettFindsLow-PricedValueBuffettOnIdentifyingGoodCompaniesBuffettonTechnologyCompanies

TheImportanceofValuingAShareSomeMoreBuffettWisdomBerkshirevs.GoldBuffettinAustraliaBuffettonPeople

4.BUFFETTDEALSCoca-ColaBuffettonCoca-Cola.

NebraskaFurnitureMartBuyInAdversityGoldmanSachsGeneralElectricSwissReinsuranceCoTheBuffettBudgetDowChemicalLubrizolCorporationNewspapersBuffett,MarsandWrigleys

BoysToys

5.THEBUFFETTLEGENDBuffettGainsControlofBerkshireHathawayTheWitandWisdomofWarrenBuffettDon'ttrytogetintouchwithmebycellphone

6.THEINVESTMENTPROCESS

TheShareMarketSomeGeneralRulesforSuccessfulShareTradingValueInvestingMarkettrendsBullMarketsBearMarketsBearmarkethistoricexamplesStockTraderversusStockInvestor

IndexFundsGrowthInvestingSociallyResponsibleInvestingMagicFormulaInvestingDartBoardMethodArbitragePricingTheory(APT)ScalpingSwingTradingContrarianInvesting

DowTheoryChartingElliottWavePrincipleSpeculationMarkTwainEffectTheTrader'sWorstEnemy-aoneleggedchairBuffettandShortSellingPersonalityandtheInvestmentProcess

7.BUFFETTBETSBIGONHOUSINGDidyouknowtheU.S.housingmarkethassuffereditsbiggestcrashever,causingamajorfallindemandandprices?

8.FINALWORDSFROMTHESAGEOFOMAHASuccessionPlansProstateCancer

Conclusion

ForewordIhavehadthegoodfortunetostudy, meet and learn fromsome amazing individuals inmy 20-year search for theanswer to an overridingquestion:

Why is it that people cangrowupinthesamecountry,have the same opportunities,even be from the samefamily, go to similar schools

and live in the sameeconomy-yetsomeexcelandoutperform financially, whileothers, often equally capableand intelligent, failmiserablyinlife?

The search for the answer tothis question has led me toseek out outstanding rolemodelsandfindextraordinarymentors that have helpedshapemylifeandenabledme

to outperform in many areasofmy life includingbusinessandinvesting.

Modelling a billionairewon'texactly guarantee that youwillbecomeoneyourself,butit could just be enough tomakeyouamillionairemanytimesoverifthatiswhatyoudesire.

I've found that true in myownlife.

Mydesiretoalwayslearnandimprove ledme to study andobserve arguably theworld’smost successful investor ofall time- Warren Buffett,dubbedtheOracleofOmaha,aninvestorwithanincredibleandalmostuncannyabilitytorecognize hidden value andopportunities in businessesthatothersoftenlack.

Buffett is the 81 year old

Chairman and CEO of theconglomerate BerkshireHathaway (NYSE: BRK-A,BRK-B).He’s also the third-richest person in the world,with a fortune that ForbesmagazineestimatedatUS$44billioninMarch2012.

His success with BerkshireHathaway,Geico, CocaColaand American Express andcountless other companies

has inspired many thousandsof investors to emulate histrading strategies andmethodsandfollowhiseverymove.

At the time of writing this,the share (stock) price ofBerkshire Hathaway Inc.(BRK-A) on the New YorkStockExchange(NYSE)wasanincredible$127,175.00pershare.228sharesweretraded

that day and share price rose0.03% on the previous day’strading. That doesn’t soundmuch, but that small riserepresentedagainof$375.00pershare.

This gave BerkshireHathaway a marketcapitalization of $210.47billion and a cash hoard thatfluctuates (mostly whenBuffett finds something to

buy), but was estimatedaround $40 billion in earlyAugust2012.

InAugust1990theBerkshireHathaway share price wasaround$6,400.WhenBuffettstarted buying shares inBerkshire Hathaway in the1960‘s they were trading ataround$12.

Despite his vast wealth,Buffett is a very down to

earth person with awonderfully droll sense ofhumour and many examplesof his humour is reflected inthis book. Buffett has mademost of his gains since theearly 1970s by continuing todevelop as an investor andembracing growth andbusiness quality. Buffettunderstands and appreciates(with the help of BerkshireHathaway vice-chairman

Charlie Munger) theopportunities thatgrowthcanbring, especially when thatgrowth requires littleadditional capital and isprotected by a sustainablecompetitive advantage,something Buffett likes tocall a business’ ‘moat’.Today,Buffetwouldn’tbe inthe market for a lot ofbusinesses he once singledoutasexamplesofa‘superior

business’ as theyare just toosmall. That’s where smallinvestorshaveanopportunity– to invest in businesses thatarejust toosmallforBuffett,but have characteristicsBuffett might appreciate.Besides size and a statedasking price (for whole-company acquisitions)Buffett has previously saidthat he looks for businessesthathave:

Demonstrated consistentearning power (futureprojections are of no interestto us, neither are“turnaround” situations).Businesses earning goodreturns on equity whileemploying little or no debt.Management in place (wecan’t supply it). Simplebusinesses (if there’s lots oftechnology, we won’tunderstand it). With this

book, Investment LessonsLearnt FromWarrenBuffett,my goal is to educate andempower the investor andentrepreneur within you toexcel to greater heights andrecognizeopportunities.

WarmestRegards,

JamieMcIntyre,September2012

CEO21stCenturyEducation

1.THEORACLEOFOMAHAI got interested [inbusiness] when I was

sevenorthereabouts.Iwastedmytimebeforethat.

WarrenBuffett

TheUltimateInvestor?TheOracleofOmaha-WarrenBuffett

Did you ever imagine that aUS$10,000 investment inBerkshireHathaway in1965,the yearWarrenBuffett tookcontrol of it, would grow tobe worth nearly US$44million, as estimated by

Forbes,byearly2012?

Incomparison,US$10,000inthe S&P (Standard & Poors)500 would have grown toonlyaboutUS$500,000.

Whetheryoulikehimornot,Buffett's investment strategyis arguably the mostsuccessful ever. With asustained compound returnthis high for so long, thereisn’t a doubt that Buffett's

legend has swelled tomythical proportions. Buthow did he do it?Known as‘the Oracle of Omaha’,Buffett is Chairman ofBerkshire Hathaway andarguably thegreatest investorof all time. His wealthfluctuates with theperformance of the market,but for the last few years hehasbeenreportedtobeworthbetween US$30 billion and

$44 billion, making him thesecond richest man in theworld. Some may think thatBuffett is a lucky investorwith a good touch. Eventhough there is some truth tothat, he and his partnerCharlie Munger take greatcare in carrying out detailedresearch before making anyinvestment.Buffett isavalueinvestor. His companyBerkshire Hathaway is

basically a holding companyfor his investments. Some ofthemajorholdingshehashadat some point or the otherincludeCoca-Cola,AmericanExpress and Gillette. Criticspredicted an end to hissuccess when hisconservative investing stylemeant missing out on thedotcom bull market. Ofcourse, he had the last laughafter the dotcom crash

because,onceagain,Buffett'stime tested strategy provedsuccessful. Value investorslookforsecuritieswithpricesthat are unjustifiably lowbasedontheirintrinsicworth.When discussing stocks,determining intrinsic valuecanbeabit trickyas there isno universally accepted wayto obtain that figure.Generally, intrinsic worth isestimated by analysing a

company's fundamentals.Like bargain hunters, valueinvestors seek underpricedyet beneficial and highquality products. In otherwords, the value investorsearches for stocks that theybelieve are undervalued bythe market. Like the bargainhunter, the value investortries to find valuable itemsthat are not recognized assuchby themajorityofother

buyers.

Buffett takes this valueinvestingapproachtoanotherlevel. Many value investorsaren't supporters of theefficient market hypothesis,but they do trust that themarketwilleventuallystarttofavour those quality stocksthat were, for a time,undervalued. Buffett,however, doesn't think on

these terms. He isn'tconcerned with the supplyanddemandintricaciesofthestockmarket.Infact,he'snotreally concerned with theactivities of the stockmarketat all.This implication is theparaphrase of his famousquote: "In the short term themarket is a popularitycontest; in the long term it isa weighing machine."Hechooses stocks solely on the

basisoftheiroverallpotentialasacompanylookingateachas a whole. Holding thesestocks as a long-term play,Buffett seeks ownership andnot capital gain in qualitycompanies extremely capableofgeneratingearnings.WhenBuffett investsinacompany,he is not concerned withwhether the market willeventually recognize itsworth; he is concerned with

how well that company canmakemoneyasabusiness.

Warren Buffett is withoutquestion the most successfulinvestor of our time (andpossibly of all times). Hiscompanies employ around260,000 people. Hisincredibly smart dealmakingabilities coupled with hiscreative, cheerful, down toearth and droll personality

allowed him to achievesuccesslikenoother.Heisalotmorethanashareinvestorwho buys, holds and sellsshares in the hope ofreceiving regular dividendsand subsequently making aprofit by selling those shareswhen their value increases.Some of his incredibly smartand complex deals are theenvyofinvestorsandbankersall over theworld, especially

hisdealsfollowingtheglobalfinancial crisis where hisinvestmentsproppedupsomemajor US businesses. Thesedeals delivered him hugereturns in just a few yearswith minimal risk at a timewhen other financiers wereducking for cover. Thisreminds me of - andepitomizes - one of Buffett’swell known quotes, “Wesimply attempt to be fearful

whenothersaregreedyandtobe greedy only when othersare fearful.” His investmenttastes are an affirmation ofthe literal value ofcommonsense. Rule NumberOne is: "Never losemoney".And Rule Number Two?"Never forget Rule NumberOne". He invests incompanieswithbusinessessosimple"evenIcanunderstandthem", with economics and

management that he likes.That means no dot coms.Buffettcomesoveraslikableandhumble:"I’manaccidentof time and geography".Buffett has simple tastes.Helivesinanunassuminghousein unassuming Omaha. Helikes steak sandwiches, hashbrownsandDairyQueenice-cream.Hegoes to thebarberin the basement of hiscorporate headquarters. He

drives an old car, carries abatteredbriefcaseanddoesn’tdress expensively because"expensive suits look cheapon me". Buffett is aremarkableman, a legendaryinvestor with a moralcompass and buckets ofhumility,whorealizesthatheand long-time businesspartner Charlie Munger areluckymen."WewereborninAmerica, had terrific parents

who saw thatwe got a goodeducation,enjoyedwonderfulfamiliesandgreathealth,andcame equipped with a'business'gene that allowsustoprosperinamannerhugelydisproportionate to thatexperienced by many peoplewho contribute as much ormore to our society's well-being."

Despite (or perhaps because

of ) that grounded approachto life, Buffett has enjoyedstratospheric investmentsuccess. In the 47 years hehas been at the helm ofBerkshire Hathaway, thecompanyhasgrownitsassetsat21.1percentayear,alittlemore than twice the 10.3percent annual gain in theS&P500.

The power of compounding

means that while the USbenchmark index has grownby 6,840 percent over thatperiod; Berkshire's bookvalue has soared by 400,863percent.Ithasrisenfrom$12a share to $125,175. In 47years, Buffett has failed tobeat the market on only sixoccasions. It was Buffett’sinterest in insurance that ledtotheriseandfinancialfameof himself and Berkshire

Hathaway. The insuranceindustry is notoriously toughbut under Buffett, thecompany has become notonlyasuccessful

share investor, but a leadingproviderofinsurance.

AtthattimeBuffettstruckupa friendship with Charles TMunger, a lawyer andinvestor. Munger eventuallyjoined Buffett at Berkshire

Hathaway as his Vice-Chairman, alter ego, andfriend. Buffett is always thefirst to acknowledge thecontribution that CharlieMunger has made toBerkshireHathaway.

Under Buffett and Munger,Berkshire Hathaway hasbecome an investment giantthatwhollyownsanumberofsuccessful companies that

include, Geico Corporation,Nebraska FurnitureMart andSee’s Candy Shops. WarrenBuffett, the man, is just ashard to define as WarrenBuffett, the investor. Heprojects a homespunfrugality, but one suspectsthat he plays his personalityas close to the chest as hedoes with his investmentsecrets.Healwaysclaimsthatit is his partner, Charlie

Munger, who keeps his feetplanted firmly in the ground.Buffett was a member ofPresident Obama's economicadvisory team during theGlobal Financial Crisis. Hehas become a legend and isgenerally ranked first in astellar cast of Americaninvestors along with mentor,Benjamin Graham. Buffett'sbiggest investments(companieshedoesn'townin

their entirety) includeAmerican Express, WellsFargo,Procter&GambleandCoca-Cola. These fourbusinesses, he notes, werefounded in 1850, 1852, 1837and1886respectively."Start-upsarenotourgame".

BerkshireHathawaySharePriceOn10August2012theshare(stock) price of BerkshireHathaway Inc. (BRK-A) onthe New York StockExchange (NYSE) was anincredible $127,175.00 pershare.228sharesweretradedthat day and share price rose0.03% on the previous day’strading. Even though it

doesn’tsoundlikemuch,thatsmall rise represented a gainof $375.00 per share. Thisgave Berkshire Hathaway amarket capitalization of$210.47 billion. In the yearup until then the share pricehad ranged $98,952.00 -$129,040.00. InAugust1990the share price was around$6,400.WhenBuffett startedbuying shares in BerkshireHathawayinthe1960‘s, they

were trading at around $12.Based on this share price,Berkshire Hathaway had aP/E (price to earnings) of18.03 and earnings per shareof $7,054.51. Buffett hasn'tpaid out a dividend toBerkshire shareholders since1967 as he believes he canreinvest the money and gethigherreturns.“It'snotinthebestinterestofshareholders.”

GeicoBuffett’s involvement withGeico is a good example ofhis investment methodology.Geico, the overnmentEmployees InsuranceCompany, took life in 1936whenaTexanbythenameofLeo Goodwin saw potentialin providing low costinsurance to governmentemployees who statistically

had lower claims than thepublic as a whole. Goodwincorrectly calculated thatdirect marketing to potentialcustomers would producemore business at less cost.The venture was successfuland in 1947, BenjaminGraham’s investment trusttooka50percentshareinthebusiness. Grahamsubsequently floated it as apublic company allocating

shares to investors in histrust. He took shares forhimself and retained hisshareholding until his death.Buffet’s initial interest inGeico sparked in 1943whilehe was still a fledglinginvestment consultant.Apparently, because of hismentor Graham’sinvolvement with Geico,Buffetdecided toconsider it.He visited the company’s

offices only to find themclosed. The night watchmantold him that there wassomeone still working lateand agreed to takeBuffett intomeethim.Thelateworkerturned out to be LorimarDavidson, who eventuallyended up running thecompany.BuffettinterrogatedDavidson for several hoursandbothmenwereimpressedby each other. Because of

these discussions, Buffett’sinvestmentpartnershiptookasmallholdinginGeico,whichiteventuallysolddown.

By 1974, Geico was introuble. The government hadbrought in no-liabilityinsurance in some areas, thecompany had extended itsclientele to higher riskcategories,andtherehadbeeninadequate provisions for

future claims. In 1976, itannounced a loss of $126million and the company’sshares, which had traded ashigh as $42, were down tojust under $5. The 1976AnnualGeneralMeetingwasa near riot with angryshareholders challenging themanagement. By then, theshares were down to about$2. Therewas then a changeincompanymanagementwith

J. J. Byrnes taking over thekeyrole.Byrnesmadedrasticchanges by cancelling high-risk policies, laying staff offand moving office. Despitethese changes, the regulatoryauthorities were hoveringover the company’s nearcarcass. Buffett had alwayskept his eye on the companyand believed that despite itsproblems,thecompany’scorebusiness was sound. The

company’s premiums alsoattracted Buffett. Insurancecompanies receive premiumsagainst the possibility thatthey may have to pay outclaimsinthefuture.Providedthe company follows soundactuarialpractices andmakesadequate provision forclaims, this gives it largeamounts of cash to invest inprofit making ventures. Thisis what Buffett calls the

‘float’. He saw this as anopportunity to provide cashresources to buy businessesandinvestinshares.

BuffettarrangedtomeetwithByrnes through anintermediary, KatherineGraham,theproprietoroftheWashingtonPost.Buffettwasapparently impressed enoughto buy 500,000 shares in thecompany through Berkshire

Hathaway with a standingorder to buy more. Thecompany started to improve,andmanaged tooffload a lotof its reinsurance risk.Salomon Bros came to theparty with an underwrittenpreferred stock issue (ofwhich Berkshire took 25percent) and Buffettintercededwith the insuranceregulators to ensure thatGeico kept its licenses. Six

months later, the shares hadrisento$8.Graham,whohadby then retired, must havebeenhappyandproudthathisprotégé had intervened.Overthe years, Geico went fromstrength to strength. Buffettalwaysseizedtheopportunityto increase the Berkshireshareholding. However,businessstartedtodropoffinthe 1980s and by 1994; thesharepricehadfallenagain.

Buffett grabbed his chanceand bought out the othershareholders for a total priceof2.3billiondollars.Geicoisnow a huge and profitableinsurer.ItsvaluetoBerkshirehowever,hasnotmerelybeenits ability to make goodreturns from insuranceactivities. Instead it’s been a‘float’ or ‘cash cow’ toprovide funds that enableBuffett and Berkshire to

acquire good businesses andshareholdings. According toBuffett, “the Geico expenseratio runs about 17 percent,wecouldrunaslowas11or12 percent if we didn't wantto grow. And manycompanies operate atanywhere from 25 to 30percent. Andwe're also veryefficient because as we getscaleadvantages,weevengetthat in terms of the loss

adjustmentcostsaswell.It'saveryefficientoperation.”

BenjaminGrahamFor readers who may beunawareofBenjaminGraham(1894-1976), he was aBritish-born Americaneconomist and professionalinvestor. He is considered tobethefirstproponentofvalueinvesting, an investmentapproach he began teachingatColumbiaBusinessSchoolin 1928 and subsequently

refined with David Doddthrough various editions oftheir famous book SecurityAnalysis.

Buffett, who credits Grahamas grounding him with asound intellectual investmentframework, described him asthe second most influentialperson in his life after hisown father. BenjaminGrahamhadaphilosophythat

investment policy can bereduced to three simplewords: "Margin of Safety" -the price at which a shareinvestment can be boughtwith minimal downside risk.The important point here isthatthemarginofsafetypriceis not the same as the pricethat an investor calculates ashare’sintrinsicworthtobe.

Aninvestormaycalculatethe

intrinsic value of a share bydiffering methods and willeventually come up with aprice that he or she believesrepresentsgoodbuyingvalue.Graham had his methods ofcalculating intrinsic value,Warren Buffett has his, andother successful investorshave theirs. Grahamacknowledges, however, thatcalculations can sometimesbe wrong, or that external

events may take place toaffect the value of the share.Itcannotalwaysbepredicted.Forsuchreasons,theinvestormusthaveamarginofsafety-an inbuilt factor that allowsfor these possibilities. ForBenjamin Graham, thebenchmarkforcalculatingthemargin of safety was theinterestratepayableforprimequality bonds. As Grahamwrote in an era when prime

bonds were much moreprominent,itismorepracticalnow to adopt, the rate ofreturn of government bondsasthebenchmark.ApparentlyBuffet follows that too.Graham then uses acomparative approach. If therisk in two forms ofinvestment is the same, thenit must be better to take theinvestment with the higherreturn. Conversely, an

investment with higher risk,suchasshares,shouldhaveahigher return whencalculating the margin ofsafety. If we modify theexample Benjamin Grahamusesinhisbook,wecantakea share investment that isyielding 10 percent earnings.For example, company A isearning 90 cents per shareandissellinginthemarketat$10. If the rate of return on

government bonds is 5percent, then the share isyielding annually an excessof5percent.

Over a period of ten years,theexcessyieldwillbeabout50 percent, which, inGraham’s opinion, may beenough, if the shareinvestment is wisely chosenin the first place. Of course,thetotalmarginofsafetywill

fluctuate depending upon thequality of the shareinvestment. In spite of thatthingscangowrong.Grahambelieveshowever,that,withadiversified portfolio of 20 ormore representative shareinvestments, the margin oferror approach will, overtime, produce satisfactoryresults.

According to Benjamin

Graham, “To have a trueinvestment, there must be atruemargin of safety. And atrue margin of safety is onethat can be demonstrated byfigures, by persuasivereasoning,andbyreferencetoabodyofactualexperience".

Graham had become wellknownduringthe1920's.Atatime when the rest of theworld was approaching the

investment arena as a giantgameofroulette,hesearchedfor stocks that were soinexpensive that they werealmost completely devoid ofrisk.OneofhisbestcallswastheNorthernPipeLine,anoiltransportation companymanagedbytheRockefellers.Thestockwas tradingat$65ashare,butafterstudyingthebalance sheet, Grahamrealizedthatthecompanyhad

bond holdings worth $95 forevery share. The valueinvestor tried to convincemanagement to sell theportfolio, but they refused.Shortlythereafter,hewagedaproxywarandsecuredaspoton the Board of Directors.The company sold its bondsand paid a dividend in theamount of $70 per share.When he was 40-years old,Ben Graham published

Security Analysis, one of thegreatest works ever pennedon the stock market. At thetime, it was risky; investingin equities had become ajoke. The Dow Jones hadfallen from 381.17 to 41.22over the course of three tofouryearsfollowingthecrashof 1929. It was around thistime that Graham came upwith theprincipleof intrinsicbusinessvalue-ameasureof

a business's true worth thatwas completely and totallyindependent of the stockprice. Using intrinsic value,investorscoulddecidewhatacompany was worth andmake investment decisionsaccordingly. His subsequentbook, The IntelligentInvestor, which Buffett calls"the greatest book oninvesting ever written",introduced the world to Mr.

Market - the best investmentanalogy in history. Throughhis simple yet profoundinvestment principles, BenGraham became an idyllicfigure and mentor to thetwenty-one year old WarrenBuffett.

Buy,notonoptimism,butonarithmeticIn many of my books Imention the importance ofhaving a mentor. Even theworld’smostsuccessfulsharetrader,WarrenBuffett,admitshaving Benjamin Graham asamentor.

In The Intelligent Investor,

Graham sums up hisinvestment philosophy bysaying that an intelligentinvestor must be "businesslike"inapproach.Investingincompany shares is just likeowning a share in a businessenterprise. Thus, theinvestment must beapproached as if one werebuying a business or apartnership. According toGraham there are four

guidingprinciples:

1. Know the business. Theinvestor needs to gainknowledgeaboutthebusinessor businesses conducted bythe company in which theypropose to invest i.e. what itsells,howitoperates,whatisthe competitive environment,what are the threats andopportunities and thestrengthsandweaknesses.An

investor, who bought a fruitshop, or a shoe factory,without investigating theproducts, and just knowingthem, would be foolish. Thesame applies to shareinvestment. An investor whodoes not understand thebusiness should not beinvestinginit.

2. Know who runs thebusiness. An investor, who

cannot operate the businessforhimselforherself,needsamanager.This is thepositionoftheaverageshareinvestor,who owns a share of anenterprise that is run byothers. The owner of abusiness in this positionwould want a manager whowill manage the businesscompetently, efficiently andhonestly. The share investorshould not be satisfied with

less. Unless the investorbelieves, through soundresearch, that thecompany ismanaged efficiently,competently and honestly, inthe best interests of theshareholders, the investmentshouldnotbemade.

3. Invest for pro!ts. Aninvestor would not normallybuy a business that did not,onproper research, appear to

have reasonable expectationsof producing good profitsover time. Share investorsshould take the sameapproachandbuy,asGrahamsays, "not on optimism, butonarithmetic".

4. Have con!dence. Grahamencourages investors toproperly research theirinvestmentsandactonitonlyif they believe their

investment judgment to besound. He cautions investorsin this position againstlistening to others. "You areneither right nor wrong justbecause the crowd disagreeswith you. You are right [orwrong]becauseyourdataandreasoning are right [orwrong]."

SomeBuffettWitWhen asked by oneshareholder,"Howwouldyoulike to be remembered in 50years?"WarrenBuffettdrollyreplied,"Foroldage."

InMay2012onSquawkBoxTV a reporter asked Buffett,“Warren, why don't you joinme and buy some cows? Imean, I like your farmlandbut, you know, you're in

Nebraska, you love steak. Imean, we can have leather,wecanhavemanure,wecanhave milk, and we can havemeat, cheese. We'll employpeople...” The then 81-yearold Buffett drolly replied(after starting the show at5am, the day after theBerkshire AGM) “Well, youcanhavethemanure,I'lltakethe meat.” “Charlie's(Munger) pretty Old

Testament.” “He (CharlieMunger)hasacolourfulwayof expressing himself.Sometimeshedoesthataboutme,too.”“Whenagirlhangsup on me once, I try again.That hasn't been toosuccessful, though,historically.Ihopemybattingaverage is better withcompanies.” “If McDonald'slowers the price ofhamburgers today, the fact I

paid more for one on Fridaydoesnot,youknow,I'mevenmoreenthusedaboutbuyingahamburgertoday.”

Buffett did an interview inearly 2012 where he wasaskedwithwhomhe had themostdifficulttimetalkingto?He came up with aninteresting answer. “Well, itwas Jackie Kennedy andPrincessDi. Iwas in a room

alone one timewith PrincessDi at a party. Somehow wefoundourselvesinthislibraryand I, in 15 minutes, I don'tthink I could take it. I hadtrouble remembering myname, I couldn't think ofanything to say, and itwasatotal disaster. “But the moreinterestingthingis,Ionlymether one other time. It was apartyatKayGraham'shouse,which was where the first

party was, and it was veryshortlybeforeherdeath.

“Theyputmeacrossthetableafter my previous disaster.But she was sitting betweenBarry Diller and TeddyForstmann. And after shedied a few weeks later, allthese papers called and said,`Whatdidshe talkabout thatevening?' I didn't tell them,butIwilltellyoutodaythata

comment shemade, which hwasabsolutelytrue,andIcansee Barry and Teddy's facesasshesaidit.

“She had been at the WhiteHouse that day and she saidthat Bill Clinton was thesexiest man alive. And Ididn't ask her who the leastsexy guy in the world alivewas. Iwasafraid Imightgetmyplayinthere.“Hehasnot

heard this before. So he'sprobably having a good daytoday.Inevertoldhimthis.”

EthicsAt one Berkshire HathawayAGMamoviekickedoff themeeting that included a clipof Buffett testifying during ascandal two decades ago atSalomon Brothers, aninvestment bank inwhich hehad just become ashareholder and boardmember. In it, Buffett said,"Lose money for the firm, I

will be understanding; lose ashred of reputation for thefirm, I will be ruthless"—arule he said is generallyapplied at Berkshire. ThisparticularAGMcameshortlyafter the fall ofDavidSokol,who left Berkshire abruptly,after admitting to buyingshares in Lubrizol shortlybefore he (successfully)recommended that Buffettbuy it. "Inexplicable" was

Buffett's description ofSokol's behavior, especiallysince early in his Berkshirecareer Mr Sokol hadselflesslygivenachunkofhislikely bonus to a colleaguethat was far bigger than hestood to gain from hisLubrizolshares.

Buffett had identified Sokolas one of his potentialsuccessors, and enthused

about him recently in thelatestBerkshireannualreport.Buffett said he mishandledthe announcement of Sokol'sdeparture, not just by issuingapoorlywordedpressreleasethat failed to sufficientlycommunicate his "outrage".He also predicted that the"damning facts" providedboth to the public and theSEC will "cause all sorts ofproblems for him in years to

come"—mentioning "insidertrading" a few times but notmaking any specificallegationagainstSokol,whohassaidhetoldMrBuffettinadvance that he owned someLubrizolshares.

PersonalTransportationIn 1986, Buffett bought aused Falcon aircraft for$850,000.Ashehadbecomeincreasingly recognizable, itwas no longer comfortablefor him to fly commercially.Adjusting to that idea of theluxurywas hard for him, buthe loved the jet immensely.Partly, his passion for jets

eventually led him topurchaseExecutiveJet in the90's.

BuffettandMungeronMathematicsandTheoriesThiswhatWarrenBuffettandCharlieMungermadeclearabouttheircompletedisdainfortheuseofhigher-ordermathematicsinfinance:

"Thereissomuchthat'sfalseandnuttyinmoderninvestingpracticeandmodern

investmentbanking,thatifyoujustreducedthenonsense,that'sagoalyoushouldreasonablyhopefor,"Mr.Buffettsaid.Regardingcomplexcalculationsusedtovaluepurchases,hesaid:"Ifyouneedtouseacomputeroracalculatortomakethecalculation,youshouldn'tbuyit."

Mungersaid:"Someofthe

worstbusinessdecisionsI'veeverseenarethosewithfutureprojectionsanddiscountsback.Itseemslikethehighermathematicswithmorefalseprecisionshouldhelpyou,butitdoesn't.Theyteachthatinbusinessschoolsbecause,well,they'vegottodosomething."

Buffettsaid:"Ifyoustandupinfrontofabusinessclass

andsayabirdinthehandisworthtwointhebush,youwon'tgettenure....Highermathematicsmaybedangerousandleadyoudownpathwaysthatarebetterleftuntrod."

2.WOODSTOCKFORCAPITALISTYoushouldinvestinabusiness that even a

fool can run, becausesomedayafoolwill.

WarrenBuffettEvery year a number ofAustraliansmaketheirwaytoOmaha, Nebraska in the USinwhat isvirtuallyanannualpilgrimage.Peoplewhomakethis trip all have a commonbond-theyarefundmanagersor people employed in the

finance industry. The reasonthey travel to Nebraska is tolistentotheOracleofOmaha,Warren Buffett, speak at theannualgeneralmeetingofhiscompany, BerkshireHathaway -Woodstock forCapitalists-andenjoyhiswitandwisdom.

AhandfulofAustralianswhotravel there are joined by upto 45,000 other people who

travel there for the samereason. A few years ago aSydney investment broker,IanDarlingtravelledthereforthe meeting and theproduction of a one-hourdocumentary on the trip thatwas later screened on ABCTV. Darling admits thatBuffett is his hero: a manwho invests successfully,ethically, and with a down-homefolksystyle.

Eachyearthefaithfulfromallover the world make thispilgrimage to Omaha,Nebraska, a small mid-westerntown,anxioustohearthe wisdom of their humbleguru. It is an eventsurrounded by ritual,adulationandafairdegreeofcultworship.Butthisisnotagathering of a religious sect;itisashareholdersmeeting.Itisamillionaire'sconvention-

probablythelargestgatheringofprivatewealthatonetime,anywhere in the world. Theprice of entry is a stake inBerkshire Hathaway, whichcosts around $127,175 for aclass A share, though meremortalsarenowabletobuyaclassBshareforaround$80.That deeply discounted priceis thanks to the stock splitBuffetthasengineeredofthatshareclasstohelpsmooththe

logistics of his purchase ofthe Burlington NorthernSantaFerailroadafewyearsago.

Theirguru,WarrenBuffett,isan unassuming man in hisseventies.Healsohappenstobeworthbetween$30billionand $44 billion, making himoneof the richestmen in theworld. His partner, CharlieMunger, also has a heroic

status amongst thousands ofdevotedfollowers.

The meeting is held in aconcert hall, and theatmosphere is somewherebetween a rock concert andthe Sermon on the Mount.People queue outside from3.15amtobesureofagoodview of Buffett and hisvicechairman, CharlieMunger.

At the 2012 annual meetingBuffettandMungeransweredquestions from attendees atthe convention centre, threebusinessanalysts,andapanelofthreejournalists.Icounted67 questions for five and ahalf hours. InAustraliamostannual meetings are stagemanaged to avoid questionsand I venture to say therewould not be one AustralianCEO who takes uncensored

questions for as long asBuffett and Munger arepreparedto.

Many politicians for instancewilltakeonlythreequestionsat a press conference. Thereare quasi-religious overtonesabout much that goes on inOmaha. The audiences hangon their every word, andjostle to be photographedwith their heroes. They

converge on his favouriterestaurant and ice-creamoutlet. They buy souvenirsfeaturing Buffett’s face, anddisplay dollar–bills bearingBuffett’sautographasthoughthey were holy relics.Woodstock for Capitalistsprovides wonderfulmarketing opportunities forall the companies BerkshireHathaway has a stake in. A28-page booklet is provided

with maps and informationincludingthetimeswhenstallholdersofferdiscounts.Thesecompanies - around 40 ofthem - set up shop in thefoyertodisplayandselltheirwares. For instance,Berkshire HathawaysubsidiaryBrooksSportssellsa $110pair of running shoesthat feature a cartoon imageofBuffettonthem.

Diamonds from Berkshire'sBorsheims jeweller, foodfrom its Dairy Queen,insurance from Geico, andCherryCoke(oneofBuffett'sfavourites) are just a few ofthe items available amongstothers that include aircraftandhomes.

AMessagefromYourChairmanThe28-pagebookletprovidedto those attending the AGMalsocontainsamessagefromthe Chairman, WarrenBuffett.“Financialjournalistsfrom organizationsrepresenting newspapers,magazinesandtelevisionwillparticipate in the question-and-answer period, asking

Charlieandmequestionsthatshareholders have submittedbye-mail.

“From the questionssubmitted, each journalistwill choose the dozen or soheorshedecidesarethemostinteresting and important.“This year we are adding asecond panel of threefinancialanalystswhofollowBerkshire. This group will

bring their own Berkshirespecific questions andalternate with journalists andthe audience. “NeitherCharlienorIwillgetsomuchas a clue about the questionstobeasked.

“Weknowthejournalistsandanalystswillpicksometoughones and that’s the way welike it.“We will have adrawingat8:15ateachofthe

13 microphones for thoseshareholders wishing to askquestions themselves. At themeeting, I will alternate thequestions asked by thejournalists and analysts withthose from the winningshareholders.”

ShoppinginOmahaAt a TV interview themorning after the 2012Berkshire AGM, aninterviewer said to Buffett,“Thirty-five thousandshareholders descended onOmaha this weekend,Warren, and they did a littlebitofshopping.”

Buffettresponded:“Yeah,it'sinterestingwhenyoumention

35,000 because our furniturestore in the one weeksurrounding the meeting,whichwillendtoday,willdo$35 million of business. Sowe've done $1,000 ofbusiness for every man,woman, and child thatattended the meeting. Andthat's almost 10 percenthigher than we've donebefore. When a retail storesdoes $35 million in a week,

that is a lot of business andthe shareholders were outgettingbargains.”

“Thatsaysanawfullotabouttheshareholders,thenumberswhoarecomingin,butitsayssomething about consumers,too,” the interviewer said.“Oh,sure.Youknow,they'reinadifferentmoodthantheywere a few years ago.And Isaw that at the jewellery

store, too. I sold jewelry fortwoandaquarterhoursandIcouldn't write tickets fastenough.CrazyWarrenwasinhiselement.”

“It's a special thing, though,when people are buying itfrom you. There's a little bitmoreofaclamorthanmaybeeverydaythat theyseethat.”“They get a better price,”Buffettsaidwithasmile.

AnInsider’sImpressionofthe2012WoodstockforCapitalistsbyBerkshireHathawayDirector,BillGates.Thislastweekend(thefirstinMay 2012, I attended theBerkshire Hathaway annualmeeting in Omaha. Oftencalled Woodstock for

Capitalists, this year’smeeting drew 35,000investors and their families,who came to learn fromWarren Buffett and CharlieMunger and participate in aninstitution unique in theworld of business. I’ve beenon the board of BerkshireHathaway since late 2004,this is my eighth annualmeeting, and I think it wasone of the best. The

centrepiece of themeeting isthe question-and-answersession that Charlie andWarren host. For five-and-a-half hours, they answeredquestions from attendees atthe convention centre, threebusinessanalysts,andapanelofthreejournalists.Icounted67 questions. By anymeasure, that’s amazing.Theaddition of the panel ofindustry analysts was new

this year, and I thought itadded a lot to the session.This year seemed to beparticularly substantive intermsof thequestions asked.WarrenandCharlieansweredquestions about successionplanning for Berkshire, theirviews on themanagement ofrisk in their insurancebusiness, taxes and politics,and the outlook for theeconomy.AnytimeI’mlucky

enough to spend time withWarren, I come awaylearning something, and thisweekend that was certainlythe case. Even though thefundamentalsofhis investingadvice and managementphilosophy haven’t reallychanged, it’s inspiring towatch someone as smart,thoughtful and principled asWarren talk about the worldof business. He is also a

master at promoting hiscompanies,and thisyearwasno exception. BerkshireHathawayrecentlyboughttheOmaha Herald newspaper,andsoWarreninvitedmetoanewspaper throwingcompetition just before theSaturday meeting. I was apaperboy growing up, but Ididn’t do as well as Warrenas we lobbed Omaha Heraldnewspapers (in front of a

large gathering of media)onto the porch of a Claytonmodular home (also aBerkshirecompany)setupinthe exhibition centre. I thinkWarrenhadbeenpracticing.

The next day, I faredsomewhat better in a Ping-Pong exhibition with ArielHsing. I met Ariel sevenyears ago, when she was 9andwasbroughtintodestroy

Warrenandme inPing-Pongat his 75th birthday party.She’sbeenplayingpingpongat the Berkshire meetingssince shewas 11.Now she’s16andwillbepartoftheU.S.Olympic Ping-Pong team inLondon.Iheldmyownforawhile, but she creamed mewhen she brought her “real”game.IthinkIdidabitbetterthanWarren. That exhibitionmatchwas placed in front of

Borsheims, the BerkshirejewellerystorewhereWarrenplayedsalespersonlaterintheday.Abigpartof theannualmeeting is catching up withfriends who come out toOmaha for it, and I got achance to spend some timewithBono,whowasthere,aswell. I also got to play somebridge along with otherBerkshire shareholders and Iate at a couple of Warren’s

favourite restaurants inOmaha. All in all, it was aterrific trip and one I lookforwardtoeveryyear,nolessthan the thousands of otherpeople who make thepilgrimagetoOmahatolearnfromthisremarkablebusinessleaderandteacher.

TheChairman'sLetterThe Chairman's Letter inmost annual reports is asdryas dust. That is not the casewithWarren Buffett's annualletter to Berkshire Hathawayshareholders. A typicalBuffett letter is full of wiseand pithy observations onbusiness, investment and lifein general. Here are 10

insights from the recentBuffettChairman'sLetter:

1.Whenyouknowyou'rethebest, you can afford to tell itlike it is. Buffett says: “Ourinsurance business had anexcellent year... that party isover. It's a certainty thatinsurance-industry profitmargins, including ours, willfall significantly in 2008. Sobe prepared for lower

insuranceearningsduring thenextfewyears."

2. Only four things reallycount when making aninvestment - "a business youunderstand, favourable long-term economics, able andtrustworthymanagement,anda sensible price tag". That'sinvestment-everything else isspeculation.

3. Invest this way and you

don't need to constantly lookforthenext"new"thing,withall the risk that it necessarilyentails.

4. Businesses are run bypeopleandthebestpeoplearenot necessarily the oneswiththe flashiest CVs. Buffettsingles out Susan Jacques,chief executive of hisjewellery retailer Borsheims."SusancametoBorsheims25

years ago as a $4-an-hoursaleswoman.She'ssmart, sheloves the business and sheloves her associates. ThatbeatshavinganMBAdegreeanytime."

5.Evenforasuper-long-terminvestor like Buffett, there'salways a time to sell.Berkshire Hathaway bought1.3 percent of PetroChina in2002 and 2003 for $488

million, valuing the Chineseoil company at $37 billionwhen Buffett thought it wasprobably worth $100 billion.WhentheChinasharebubbletook itsvalue to$275billionin 2007, way above itsfundamental value, Buffettcashed in his holding for $4billion, an eightfold rise infiveyears.

6. Buffett believes

‘incentivisation’ of managerson the basis of earnings pershare encouragesdisingenuous, if notdownright dishonest,behaviour. Take theassumptions about futureinvestment returns incorporate pension schemes.The average in America is 8percent,despitethefactthataquarter of pension funds areinbondsandcash(forwhich

a5percentreturnwouldbeareasonable expectation) andthe rest in equities, whichrosebyjust5.3percentayearon average over the 20thcentury as a whole (aremarkable period of growthfor the US economy).Managersdon'treallybelievethey'll get 8 percent, butpretending they will meansthey can contribute less andboost their reported profits.

"If they are wrong, thechickenswon'tcomehometoroost until long after theyretire."

7. Between 2002 and 2007,Buffett notes, the euroappreciated from 95 cents to$1.37,yettheUStradedeficitwith Germany widened from$36billionto$45billion,thereverse of what should havehappened. As long as these

imbalances continue,foreigners will continue tobuyupAmericaonthecheap."This is our doing, not somenefarious plot by foreigngovernments."

8.Buffetthasaneyeforwittyone-liners, which make hisletters a joy to read.Here hequotes John Stumpf, chiefexecutiveofWellsFargo, onthe behaviour of lenders: "It

isinterestingthattheindustryhas invented new ways tolose money when the oldways seemed to work justfine."

9. He sees the joke, butBuffett also knows that thereis something profoundlywrong at the heart ofcorporateAmerica."Ashouseprices fall, a huge amount offinancial folly is being

exposed.Youonlylearnwhohas been swimming nakedwhen the tide goes out - andwhat we are witnessing atsome of our largest financialinstitutionsisanuglysight."

10. Investors should berealists but the best areoptimists too. Buffett hastaken premiums worth $4.5billion from investors buyinginsurance from him against

four major stock marketsbeinglowerin15to20yearsthan they are today. He isconfidentthathewillholdonto thosepremiumsand in themeantimehewillusethecashto make another smallfortune.Whataman,whataninvestor!

SomeBuffettMusingsfromHisChairmen’sLettersandAnnualMeetingsIn 1974: “Never count onmakingagoodsale.Havethepurchase price be soattractive that even amediocre sale gives goodresults.”

1978: “We have tried

occasionally to buy toads atbargain prices with resultsthat have been chronicled inpast reports. Clearly ourkissesfellflat.Wehavedonewellwithacoupleofprinces—buttheywereprinceswhenpurchased.

Atleastourkissesdidn’tturnthemintotoads.And,finally,we have occasionally beenquitesuccessfulinpurchasing

fractional interests ineasilyidentifiable princes attoad-likeprices.”

1981:“It’ssimplytosaythatmanagers and investors alikemust understand thataccounting numbers are thebeginning, not the end, ofbusinessvaluation.”

1982: “When returns oncapital are ordinary, an earn-more-by-putting-upmore

record isnogreatmanagerialachievement.Youcangetthesame result personally whileoperating from your rockingchair. Just quadruple thecapital you commit to asavingsaccountandyouwillquadrupleyourearnings.Youwouldhardlyexpecthosannasfor that particularaccomplishment. Yet,retirement announcementsregularly sing the praises of

CEOs who have, say,quadrupled earnings of theirwidget company during theirreign-withnooneexaminingwhether this gain wasattributable simply to manyyearsofretainedearningsandthe workings of compoundinterest.”

1985: “Ben Grahams’s Mr.Market allegory may seemout-of-date in today's

investment world, in whichmost professionals andacademicians talkofefficientmarkets, dynamic hedgingand betas. Their interest insuch matters isunderstandable, sincetechniques shrouded inmysteryclearlyhavevaluetothe purveyor of investmentadvice. After all, what witchdoctor has ever achievedfame and fortune by simply

advising‘Taketwoaspirins?’

1987: “Over the years,Charlie (Munger, BerkshireHathaway Vice Chairman)and I have observed manyaccounting-based frauds ofstaggering size. Few of theperpetrators have beenpunished; many have noteven been censured. It hasbeen far safer to steal largesums with a pen than small

sumswitha

gun.”

1988:“Infact,whenweownportions of outstandingbusinesses with outstandingmanagements, our favouriteholdingperiodisforever.Forexample:

(1) As if governed byNewton's First Law ofMotion, an institution will

resist any change in itscurrent direction; (2) Just asworkexpandstofillavailabletime, corporate projects oracquisitions materialize tosoak up available funds; (3)Any business craving theleader, however foolish, willbe quickly supported bydetailed rate-of-return andstrategic studies prepared byhis troops; and (4) Thebehaviourofpeercompanies,

whether they are expanding,acquiring, setting executivecompensation or whatever,willbe

mindlesslyimitated.”

1989: “The most commoncause of low prices ispessimism -sometimespervasive,sometimes specific to acompany or industry. Wewant to do business in such

an environment, not becausewe like pessimism butbecause we like the prices itproduces. Optimism is thereal enemy of the rationalbuyer.”

1990: “Our stay-putbehaviour reflects our viewthat the stock market servesas a relocation centre wheremoney is moved from theactivetothepatient.”

1991: “We've long felt thatthe only value of stockforecastersistomakefortunetellers look good. Even now,Charlie and I continue tobelievethatshort-termmarketforecasts are poison andshouldbekeptlockedupinasafe place, away fromchildren and also fromgrown-upswhobehaveinthemarketlikechildren.”

1992: “The strategy we'veadopted precludes ourfollowing standarddiversification dogma. Manypundits would therefore saythe strategy must be riskierthan that employed by moreconventional investors. Wedisagree. We believe that apolicy of portfolioconcentration may welldecreaseriskif it raises,as itshould, both the intensity

withwhichaninvestorthinksabout a business and thecomfort-level he must feelwith its economiccharacteristics before buyingintoit.Instatingthisopinion,we define risk, usingdictionary terms, as "thepossibilityoflossorinjury."

1993: “In a bull market, onemust avoid the error of thepreening duck that quacks

boastfully after a torrentialrainstorm, thinking that itspaddlingskillshavecauseditto rise in theworld.A right-thinking duck would insteadcompare itspositionafter thedownpourtothatoftheotherducksonthe

pond.”

1996: “Do not think ofyourself as merely owning apiece of paper whose price

wigglesarounddailyandthatis a candidate for sale whensome economic or politicaleventmakesyounervous.…Insteadvisualizeyourselfasapart ownerof abusiness thatyou expect to stay withindefinitely, much as youmightifyouownedafarmorapartment house inpartnership with members ofyourfamily.”

1996: “We continue tomakemore money when snoringthan when active. … Yousimply want to acquire, at asensibleprice,abusinesswithexcellenteconomicsandable,honest management.Thereafter, you need onlymonitor whether thesequalities are beingpreserved.”

1997: “But now for the final

exam: If you expect to be anetsaverduringthenextfiveyears, should you hope for ahigher or lower stockmarketduring that period? Manyinvestors get this onewrong.Eventhoughtheyaregoingtobe net buyers of stocks formanyyearstocome,theyareelatedwhen stock prices riseanddepressedwhentheyfall.Ineffect,theyrejoicebecauseprices have risen for the

"hamburgers" they will soonbe buying. This reactionmakes no sense. Only thosewhowillbesellersofequitiesin the near future should behappy at seeing stocks rise.Prospective purchasersshould much prefer sinkingprices.”

1997: “Our future rates ofgain will fall far short ofthose achieved in the past.

Berkshire's capital base isnowsimplytoolargetoallowus to earn truly outsizedreturns. If you believeotherwise, you shouldconsideracareer in salesbutavoid one in mathematics(bearing in mind that thereare reallyonly threekindsofpeople in the world: thosewhocancountandthosewhocan't).”

1997: “If you're an investor,you're looking on what theasset isgoing todo, ifyou'rea speculator, you'recommonly focusing on whatthe price of the object isgoingtodo,andthat'snotourgame.”

1997: “If you understood abusiness perfectly and thefuture of the business, youwould need very little in the

wayofamarginofsafety.So,the more vulnerable thebusinessis,assumingyoustillwanttoinvestinit,thelargermargin of safety you'd need.If you're driving a truckacross a bridge that says itholds 10,000 pounds andyou've got a 9,800 poundvehicle, if the bridge is 6inches above the crevice itcovers, you may feel okay,but if it's over the Grand

Canyon, you may feel youwant a little largermarginofsafety...”

1998: “Intrinsic value can bedefined simply: It is thediscounted value of the cashthat can be taken out of abusinessduring its remaininglife. The calculation ofintrinsicvalue, though, isnotso simple. As our definitionsuggests, intrinsicvalue isan

estimate rather thanaprecisefigure, and it is additionallyan estimate that must bechangedifinterestratesmoveor forecasts of future cashflowsarerevised.”

1998: “Investors makingpurchases in an overheatedmarketneedtorecognizethatitmayoftentakeanextendedperiod for the value of evenan outstanding company to

catch up with the price theypaid.”

1998: “Time is the enemyofthe poor business and thefriendofthegreatbusiness.Ifyou have a business that'searning 20%-25% on equity,time is your friend.But timeisyourenemyifyourmoneyisinalowreturnbusiness.”

1998: “Wedon't get paid foractivity, just for being right.

As to how long we'll wait,we'llwaitindefinitely.”

1999: “We will rejectinteresting opportunitiesrather than over-leverage ourbalancesheet.”

1999: “The line separatinginvestment and speculation,which is never bright andclear, becomes blurred stillfurther when most marketparticipants have recently

enjoyed triumphs. Nothingsedates rationality like largedoses of effortless money.After a heady experience ofthat kind, normally sensiblepeople drift into behaviorakin to that of Cinderella atthe ball. They know thatoverstaying the festivities—that is, continuing tospeculate in companies thathave gigantic valuationsrelative to the cash they are

likelytogenerateinthefuture—will eventually bring onpumpkinsandmice.Buttheynevertheless hate to miss asingleminute of what is onehelluva party. Therefore, thegiddy participants all plan toleave just seconds beforemidnight. There's a problem,though:Theyaredancinginaroom in which the clockshavenohands.”

1999: “We're morecomfortable in that kind ofbusiness. Itmeanswemiss alot of very big winners. Butwe wouldn't know how topickthemoutanyway.Italsomeanswehave very fewbiglosers - and that's quitehelpful over time. We'reperfectly willing to tradeaway a big payoff for acertainpayoff.”

1999:“Thestockmarket isano-called-strike game. Youdon't have to swing ateverything—youcanwait foryour pitch. The problemwhen you're a moneymanager is that your fanskeep yelling, ‘Swing, youbum!’”

2000: “Instead, we try toapplyAesop’s2,600-year-oldequation to opportunities in

which we have reasonableconfidence as to how manybirds are in the bush andwhen they will emerge (aformulation that mygrandsons would probablyupdate to, ‘A girl in aconvertible is worth five inthephonebook.’).”

2000: “But a pin lies inwaitfor every bubble. And whenthe two eventually meet, a

newwaveof investors learnssome very old lessons: First,many in Wall Street are acommunity in which qualitycontrol isnotprizedandwillsell investors anything theywillbuy.Second,speculationis most dangerous when itlookseasiest.”

2000: “After all, you onlyfind out who is swimmingnaked when the tide goes

out.”

2001: “Investors shouldremember that excitementand expenses are theirenemies.Andiftheyinsistontrying to time theirparticipation in equities, theyshould try tobefearfulwhenothers are greedy and greedywhenothersarefearful.”

2001:Onbeingaskedaboutasuccession plan. “When they

open that envelope, the firstinstructionistotakemypulseagain, after mentioning thatthe instructions of hissuccession are sealed in anenvelopeatheadquarters.”

2004: “If you have a greatmanager, you want to payhimverywell.”

2004: “Long ago, Sir IsaacNewtongaveusthreelawsofmotion,whichwerethework

of genius. But Sir Isaac'stalents didn't extend toinvesting:Helostabundleinthe South Sea Bubble,explaining later, ‘I cancalculatethemovementofthestars, but not themadness ofmen.’ If he had not beentraumatized by this loss, SirIsaac might well have goneontodiscovertheFourthLawofMotion:For investorsasawhole, returns decrease as

motionincreases.”

2005: “The worst sort ofbusiness is one that growsrapidly, requires significantcapital to engender thegrowth, and then earns littleor no money. Think airlines.Here a durable competitiveadvantagehasprovenelusiveever since the days of theWrightBrothers. Indeed, if afarsighted capitalist had been

present at Kitty Hawk, hewould have done hissuccessors a huge favor byshootingOrvilledown.”

2007: “I've reluctantlydiscarded the notion ofcontinuing to manage theportfolio after my death -abandoning my hope to givenew meaning to the term‘thinkingoutsidethebox.’”

2007: “Long ago, Ben

Grahamtaughtmethat‘Priceis what you pay; value iswhatyouget.’Whetherwe’retalkingaboutsocksorstocks,I like buying qualitymerchandise when it ismarkeddown.”

2008: “Putting people intohomes, though a desirablegoal, shouldn’t be ourcountry’s primary objective.Keeping them in theirhomes

shouldbetheambition.”

2008: “We never want tocount on the kindness ofstrangers in order to meettomorrow’s obligations.Whenforcedtochoose,Iwillnottradeevenanight’ssleepfor the chance of extraprofits.”

2008: “Upon leaving [thederivatives business], ourfeelings about the business

mirrored a line in a countrysong: ‘I liked you betterbefore I got to know you sowell.’”

Buffettat5amOntheMondayafterthe2012AGM which was held overthe weekend, during whichBuffett and Munger spentthree and a half hoursanswering 54 questions fromshareholders and financialcommentators, WarrenBuffett then 81-years old,spent three hours answeringquestions on the TV show

SQUAWKBOX,inaspecialpresentation of the show livefrom the Hollywood Dinerjust outside Omaha.Amazingly Buffett was thereand ready to go at 5.00am!These are someof the thingshehadtosayontheshow.“Ibought my first stock in thespringof1942whenIwas11years old.And, at that point,wewerelosingthewarofthePacific to the Japanese.And,

I mean, if you read theheadlineseveryday, itwouldbekindoffuntogobackandlook at the headlines on theday I bought my first stockbecause, you know, thingswerelookingterribleuntilthebattle of Midway, and Ibought in a few monthsbefore that. So I think it's aterrible mistake. I think theworst mistake you can makein stocks is to buy or sell

basedoncurrentheadlines.”

Buffett was asked, “Are youtalkingaboutseriousamountsof money that you put intothe market?” He responded,Yeah.Well,Imean,weputasmuch aswe can buywithoutdisturbingtheprice.”

“HowmuchdidyouspendonFriday?” “Well, we probablyspentabout60million.Yeah.We try to buy maybe 10

percent of what trades orsomething of the sort whenwe're buying a stock. Whenwewere buying IBM, I usedto, day by day, I would justaccount for10percentof thetrading.”

“Wow.But itwas done veryquietly, you kind of movedyourwaythrough?”

“Yeah. I put duct tape overmymouth.”

3.THEBUFFETTINVESTMENTSTRATEGY

Widediversification isonly required wheninvestors do notunderstand what theyaredoing.

WarrenBuffett

WarrenBuffett'sShareSelectionMethodologyI personally use WarrenBuffett's share selectionmethodology - he has threebasiccriteria:

1.He never buys a companythat's not making profit.Sounds simplistic but howmanypeoplebuyashareona

hottipandnevercheckifit'saprofitablecompany?

2.He never buys a companyif he doesn't understand howit makes its money. Why?Well ifhedoesn'tunderstandhow they make money thenhow can he predict theirlikely future? For instanceBuffet didn't buy Enronshares, as he couldn'tunderstand how they were

making money. Nor couldanyone else for that matter,not even Enron executives.Buffet was criticized formissing out on the dot comboombeforetheboomturnedintothedotcomcrash.

Critics said Buffet is oldschool, is losinghismarbles,he simply doesn't understandthe future, all because herefused to invest in dot com

companiesdespite theirsharepricesgoingfromafewcentstoupto$100ormoreinlessthen a year. But he stuck byhis threepointcriteriaandasa result he couldn'tunderstand how they weremaking money. Generallythat's because they weren'tand many never did. So heavoided the dot com crashbecause he stuck tofundamentals.Mybelief is if

it works for Buffet it worksfor me. 3. He never buys acompany that he considersover valued. This can be amoredifficultassessmentandbecomes a judgement call.But ideally he is looking forcompaniesthesharemarketisunder valuing so that he canget abargain.Buffett says tolook at buying a share as ifyou were going to buy theentire company. Some may

say that's all right for Buffetas he usually is buying theentirecompany,nevertheless,itisstillgoodadvice.

If you were buying anewsagent, corner store orrestaurantyouwouldcheckifis profitable and check if theaccountingisreliableandyouwould want to understandhowitmakesitsmoney.Evenif it is profitable and you

understand how it makes itsmoney and is only worth$250,000 you aren't going tobuy it at $300,000. But youwouldwantitatsay$200,000or less, being $50,000 belowvalue.Makessense?

Buffet sticks to this simplecriteria and has consequentlybecome a billionaire. ToBuffett, management iseverything. He simply won't

buyabusinessorastockifhedoesn't have faith in theexecutive suite. Indeed, intermsofinvestmentcriteria,astrong management teamcarries a lot of weight. "Atheadquarters, we're nottraining managers, we'refinding them," explainsMunger, who adds that it'spretty easy to identify talent."If you're standing onEverest,youdon'thave tobe

a genius to recognize it's ahighmountain."

HowBuffettFindsLow-PricedValueWewill look at how Buffettfinds low-priced value withsome questions relating towhen he evaluates therelationshipbetweenastock'slevel of excellence and itsprice.Keepinmindthattheseare not the only things heanalyses but rather a briefsummary of what Buffett

looksfor:

1.Hasthecompanyconsistentlyperformedwell?

Sometimes return on equity(ROE) is referred to as"stockholder's return oninvestment". It reveals therateatwhichshareholdersareearning income on theirshares. Buffett always looksatROEtoseewhetherornot

a company has consistentlyperformedwellincomparisonto other companies in thesame industry. Looking atjust last year’s ROE is notenough. The investor shouldview the ROE from the pastfiveto10yearstogetagoodidea of historicalperformance.

2.Hasthecompanyavoidedexcessdebt?

The debt/equity ratio isanother key characteristicBuffett considers carefully.Buffettprefers to seea smallamount of debt so thatearnings growth is beinggenerated from shareholders'equity as opposed toborrowed money. This ratioshows the proportion ofequity and debt the companyis using to finance its assets.Iftheratioishigherthendebt

ratherthanequityisfinancingthecompany.Ahighlevelofdebt compared to equity canresultinvolatileearningsandlarge interest expenses.Foramore stringent test, investorssometimesuseonlylong-termdebtinsteadoftotalliabilitiesinthecalculationabove.

3.Arepro"tmarginshigh?Aretheyincreasing?

The profitability of a

companydependsnotonlyonhaving a good profit marginbut also on consistentlyincreasing its profit margin.This margin is calculated bydividing net income by netsales. To get a goodindication of historical profitmargins, investors shouldlook back at least five years.A high profit marginindicates that thecompany isexecuting its business well,

butincreasingmarginsmeansmanagement has beenextremely efficient andsuccessful at controllingexpenses.

4.Howlonghasthecompanybeenpublic?

Buffett typically considersonly companies that havebeen around for at least 10years.Asaresult,mostofthetechnology companies that

have had their initial publicofferings (IPOs) in the pastdecade wouldn't get onBuffett's radar (not tomention the fact that Buffettwill investonly inabusinessthathefullyunderstands,andhe admittedly does notunderstand what a lot oftoday'stechnologycompaniesactually do). It makes sensethatoneofBuffet'scriteria islongevity: value-investing

mean looking at companiesthat have stood the test oftime but are currentlyundervalued. Neverunderestimate the value ofhistoricalperformance,whichdemonstrates the company'sability (or inability) toincrease shareholder value.Keep in mind, however, thatthe past performance of astock does not guaranteefuture performance - the job

of the value investor is todetermine how well thecompany can perform in thefuture as it did in the past.Determiningthisisinherentlytricky, but obviously Buffettisverygoodatit.

5.Dothecompany'sproductsrelyonacommodity?

Initially you might think ofthis question as a radical

approach to narrowing downacompany.Buffett,however,sees this question as animportant one. He tends toshy away (but not always)from companies whoseproductsareindistinguishablefromthoseofitscompetitors,andthosethatrelysolelyonacommodity such as oil andgas. If a company does notoffer anything different thananother firmwithin the same

industry, Buffett sees littlethat sets the company apart.Anycharacteristicthatishardto replicate is what Buffettcalls a company's economicmoat, or competitiveadvantage. The wider themoat,thetougher

it is for a competitor to gainmarketshare.

6.Isthestocksellingata25%discounttoitsreal

value?

This is the kicker. Findingcompaniesthatmeettheotherfive criteria is one thing, butdeterminingwhether theyareundervalued is the mostdifficult part of valueinvesting, and Buffett's mostimportantskill.Tocheckthis,an investor must determinethe intrinsic value of acompany by analysing a

number of businessfundamentals, includingearnings,revenuesandassets.Acompany'sintrinsicvalueisusually higher (and morecomplicated) than itsliquidation value i.e. what acompanywouldbeworthifitwere broken up and soldtoday. The liquidation valuedoesn't include intangiblessuch as the value of a brandname, which is not directly

statedonfinancialstatements.Once Buffett determines theintrinsic value of thecompany as a whole, hecompares it to its currentmarket capitalization - thecurrent totalworth (price). Ifhis measurement of intrinsicvalue is at least 25% higherthan the company's marketcapitalization,Buffettseesthecompany to have value.Soundseasy,doesn'tit?Well,

Buffett's success, however,depends on his unmatchedskill in accuratelydetermining this intrinsicvalue.While we can outlinesomeofhis criteria,wehaveno way of knowing exactlyhow he gained such precisemastery of calculating value.It is interesting to note thatvirtually all directors ofpubliccompaniesinAustraliahave indemnity insurance

paid for by the company.Bycontrast,BerkshireHathawaydoes not carry director’sinsurance. Warren Buffettsays, "If something reallycatastrophic happens on ourdirectors' watch, they areexposedtolossesthatwillfarexceedyours."

BuffettOnIdentifyingGoodCompanies"Wedon'tdoduediligenceorgooutkickingtires.Itdoesn'tmatter. What matters isunderstanding thecompetitive dynamics of abusiness. We can't be takenbyaguywithasalespitch...

“What really counts is the

presence of a competitiveadvantage. You want abusinesswithabigcastleanda moat around it, and youwantthatmoattowidenovertime. Coke and Kodak bothhad marvellous moats 20 or25 years ago. Kodak's hasnarrowed (it has almostcompletely disappeared),whileCokehasbeenbuildingits moat. We want aneconomiccastle."

“Retail investors should notpayanyattentiontotheday'snews. If they're payingattention to the day's newsand they're trying tobuyandsellstocksbasedontheday'snews, they're never going tobesuccessfulinvestors.

“The idea is to buy a goodbusiness.Imean,it'sthesameway as if you and your, youknow, your brother went out

tobuyabusiness.You'dlookaround for a company, somelittle business that had goodprospects over time, haddecent and honestmanagement and where thepricemadesense.

“And you wouldn't read thenewspaper before you do it.My partner, CharlieMunger,and I have been workingtogetherforover50years.In

both buying a $34 billionbusiness like BurlingtonNorthern or buying 100shares of stock, we havenever talked about the day'snews or what's going, youknow,or thatweek'snewsorabout month's news. We'relookingatwherethebusinessis going to be 10 years fromnow because we're going toown it then. That's where itcounts.”

BuffettonTechnologyCompaniesBuffett says while he would"not be at all surprised" ifApple(tradingatover$600ashare in mid-2012) andGoogle (tradingatover$650ashareinmid-2012arewortha "lotmore" in ten years, hesees them as too risky forBerkshiretoinvestin.But,he

says, "I sure as hellwouldn'tshortthemeither."

Buffett and his partnerCharlie Munger toldshareholders they simplydon't knowenough about thecompanies, their potentialcompetitors, and wheretechnology might be going,for them to see Google andApple as "inevitable"winners.

They consider Berkshire'srecently acquired $13.1billion stake in IBM(accordingtoBuffett“IBMisreally a branded solutionsprovider at heart), as amuchsaferinvestment,eventhoughitcanalsobecharacterizedasa tech company. “Thechances of being wrong inIBM are probably less, atleast forus, than the chancesofgoingwronginGoogleand

Apple."

“I'm an agnostic on acompany likeFacebook.Anytime you get a trulyextraordinary business, andit's obviously anextraordinary business, butthey're the hardest ones tovaluebecausethequestionis,is whether five or 10 yearsfrom now they will be asextraordinary as they are

now, even though they maykeep doing more and morewonderful things. So it's justharder to figureout than,oh,we'llsayCoca-Cola.

“Imean,Coca-Cola10yearsfrom now is going to bebiggerandmoreprofitable,inmy view, than it is now, buttherewon'tbesomequantumchangeineitherdirection.Soit's much easier for me to

figureoutCoca-Cola'sworththanGoogle or Facebook or,youknow,younameit.”Thisis what Charlie Munger hadto say about the technologyindustry.

“Take the rapid training bythe computer geniuses withthe computer algorithms.Those people have all thesocial utility of a bunch ofrats admitted to a granary. I

neverwouldhaveallowedtherats to get in the granary. Idon'twantthebrilliantyoungmen of America doting theirlives at being rats insomebody else's granary.That'snotmyideaoftherightway to run the republic.Andifyouletmewritethelaws,itwouldn't happen. But ofcourse, nobody's going to dothat.”

TheImportanceofValuingAShareWarrenBuffett says that youshould value a share as youwould value a privatebusiness. “In the privatesector,P/E (Price /Earnings)means nothing. In fact,earnings mean nothing. Theonly thing that matters inbuying a private business istheamountofcashthatitcan

generate-itsfreecashflow.

“When you buy a stock, youarebuyingthecompany’snetworthanda right to thecashthat the company cangenerate in the future.“Earnings and revenue arenumbers reported on thecompany’s tax return andmean nothing to a businessowner or investor.You can’tspend earnings to grow the

business-youcanonlyspendthe cash thatmakes it to thebank after all expenses arepaid.

“Ifyouknowthenetworthofthecompany(theShareholderEquity) and can reasonablyestimatethefuturecashofthebusiness with a degree ofconfidence- you can quicklycalculate the true value of abusiness.Onceyouknowthe

value, you should insist onbuyingthestockatadiscounttoitsvalue.

“This discount is a MarginOf Safety so that you stillearn attractive returns if thecompanydoesnotproduceasmuch cash as you hadexpected.

“Onlywhenthestockpriceisat or below your Margin OfSafety should you consider

investing. Investing in thisway can produce amazingresults:

“It would have protectedinvestors in the US from theLucent, Enron, andWorldcom scams becausefreecashflowishardtofake– even when earnings andother tax return numbers aregrowing; and, “It will allowyoutoinvestwithconfidence

and check in on your stocksonce a year. Buyingbusinesses as a businessinvestor gives you theconfidence and comfort toknowthatyouownwonderfulcompaniesatattractivepricesand that you do not need toconcern yourself with thedaily silliness of the stockmarkets because, over time,as your company’s valuegrows, its stock price will

havetofollow.”

SomeMoreBuffettWisdomWhen asked about whatindicatorofeconomicactivityhe would watch, if he couldonly choose one, Buffettstated that freight car-loadings and truck tonnagemovedwould be the ones hewouldtrack.

“I think cash is probably as

riskyanassetasyoucanownover time. So you're nottaking risk off when you gointocash.Youaregoingintosomething that is sure todecline in purchasing powerover time. So that is thebiggest risk on trade I knowistoowncash.”

“Success in investing doesn'tcorrelate with I.Q. onceyou'reabovethelevelof125.

Once you have ordinaryintelligence,whatyouneedisthe temperament to controltheurgesthatgetotherpeopleintotroubleininvesting.”

“When you get somebodylike a,Walt Disney or SteveJobsorMark(Zuckerberg)orBill (Gates), what you seewith those people is apassion.And to some extendthey're not thinking solely

aboutthemoneyinvolved.

“Imean,theyarenotrunningtheir businesses to getextremely rich. They don'tmind getting rich, and youknow they know how to dothat, too, but what reallydrives them is what they'recreating and you saw thatwith Bill, you see it withMarkandwhenyouget that,when you find that and

they've got big ideas and therest of the world doesn'tnecessarily understand themverywell,butthey'redoingit.Youknow,youcangetsomeamazingachievements.”

“I think equities are veryattractive for the long term.Theymaygetmoreattractivenextweekornextmonth.Butit's the same thing I said inOctober of 2008. I didn't

know where bottoms weregoing to be or where theyweregoingtobeinayear.

“But equities, producingbusinesses, good producingbusinessesareagreatthingtoown over time, and they'vebeen a great thing to own,you know, for a hundred,several hundred years in thiscountry.

“Theywillbeagreatthingto

own for the next 100 years.Butwhoknowswhethertheygo up or down in price nextweek. As to the volume,though, there's still way toomuchvolumeinthemarket.Imean, the idea that theownership of a companyshould turn over a hundredpercent in a year, that is notthe way people behave withapartment houses, it's not theway they behave with

farmland.

“But theyhave thisnotion instocks that they ought to dosomething every day. Thebest thing todowithstock isbuy stock with a goodcompanyanddon'tlookattheprice for five years orsomething.”

“WheneverIreadaboutsomecompany undertaking a cost-cutting program, I know it's

not a company that reallyknows what costs are about.The really good managerdoes not wake up in themorning and say 'This is theday I'm going to cut costs,'any more than he wakes upand decides to practicebreathing.”

“Myideaofagroupdecisionistolookinthemirror.”

“Youwant tobewitha low-

cost operator. Now, that's anadvantagethatWal-Marthas,that's an advantage a Costcohas, and you can lookthroughout the field. Peoplethat are low-cost operatorshaveanadvantage.”

“Whenmanagerswant togetacross the factsofabusinessto you, it can be done withthe rules of accounting.Unfortunately, when they

wanttoplaygames,atleastinsomeindustries,itcanalsobedone with the rules ofaccounting. If you can'trecognizethedifferences,youshouldn't be in the equity-pickingbusiness.”

“I'veoftenfelttheremightbemore to be gained bystudying business failuresthanbusinesssuccesses.”

“The investor of today does

not profit from yesterday’sgrowth.”

“There are all kinds ofbusinesses that Charlie and Idon’t understand, but thatdoesn’tcauseustostayupatnight.It justmeanswegoonto the next one, and that’swhat the individual investorshoulddo.

1. We enjoy the process farmorethantheproceeds.

2. We simply attempt to befearful when others aregreedyandtobegreedyonlywhenothersarefearful.

3. We’ve long felt that theonly value of stockforecastersistomakefortunetellers look good. Even now,Charlie and I continue tobelievethatshort-termmarketforecasts are poison andshouldbekeptlockedupina

safe place, away fromchildren and also fromgrownupswho behave in themarketlikechildren.

4.Whenamanagement teamwith a reputation forbrilliance tackles a businesswith a reputation for badeconomics,itisthereputationof the business that remainsintact.”

“Tobesuccessful,youshould

concentrate on the world ofcompanies, not arcaneaccountingmathematics.”

“We believe that accordingthe name "investors" toinstitutionsthattradeactivelyis like calling someone whorepeatedly engages in one-nightstandsa"romantic.”

“It's got to be the bestintellectualexerciseoutthere.You're seeing through new

situations every tenminutes…Inthestockmarketyoudon'tbaseyourdecisionsonwhat themarket is doing,but on what you think isrational….”

“Bridge is about weighinggain/loss ratios.You'redoingcalculationsallthetime.

“Theapproachandstrategiesare very similar in that yougatheralltheinformationyou

can and then keep adding tothat base of information asthings develop. You dowhatever the probabilitiesindicated based on theknowledge that you have atthat time,butyouarealwayswilling to modify yourbehaviour or your approachasyougetnewinformation.

“In bridge, you behave in away that gets the best from

yourpartner.Andinbusiness,you behave in the way thatgets the best from yourmanagers and youremployees.”

“Chainsofhabitaretoolightto be felt until they are tooheavytobebroken.”

“Thericharealwaysgoingtosay that, youknow, just giveusmoremoney andwe'll gooutandspendmoreand then

itwill all trickledown to therest of you. But that has notworkedthelast10years,andIhopetheAmericanpubliciscatchingon.”

“There seems to be someperversehumancharacteristicthatlikestomakeeasythingsdifficult.”

“Allkindsofthingsaregoingtohappen.I'mnottryingtositaround and predict which of

thosearegoingtohappen,I'mtrying to figure wherebusinesseswill be five or 10years from now. Andwhenever we buy a stock Isay am I happy owning thatstock if the stock marketclosesforacoupleofyears?

“Youknow,ifI'vegotagoodbusiness here and the stockmarketcloses foracoupleofyears, I'm fine.And if I own

part of a good business I donot need the stockmarket tobeopenforthenextcoupleofyearstodofineininvesting.”

“Berkshire has beenunderpriced sometimesduring the 45-plus years I'vebeen there and has beenoverpriced.Most of the timeit's been inwith the rangeofvalue.Inthenext50yearsit'llbeoverpriced,sometimes it'll

beunderpriced,it'sthenatureof stocks. That'swhatmakesstock investingsowonderful.I mean, if everything wasperfectly priced all the timethere would be no money inthegame.”

“Iwould love it if they onlyallowed me and a wholebunchofpsychoticdrunks totrade in stocks and I wouldgetveryrich.”

“The real problem in stocksis that people are emotionalabout them. I mean, theproblem isn't with thecompanies; the problem iswith the people that callthemselves investors. If youlook at how Americanbusiness has done overhistory, it's donemagnificently.

“And if you just owned a

cross-sectionof it, youdidn'tneed to know how to run abusiness or read a balancesheetoranything.

“But the problem is thatpeople get excited aboutgetting rich very quickly ortheygetdepressedwhentheythought they were going togetrichveryquicklyandtheydidn't, and people beatthemselves in the stock

market. The companies don'tbeat them, the stocks don'tbeat them, they beatthemselves.”

“Therewillbebubblesin thefuture. I mean, people getexcitedaboutthingsthathavegone up in price, and thatvery excitement becomesfurtherproof to themand theriseinprices.

“Imean, it becomes circular,

and it keeps going until itends,andthat'swhenbubblespop.Butwewillhavealotofbubbles,andyoucangetveryrich on bubbles if you takeadvantageofthemratherthanparticipateinthem.”

“If you print enoughmoney,you know, the price ofeverything will go up eventhough thevalueof itdoesn'tgoup,inasense.Andifyou

mail out a million dollars toevery American family, youknow, you will not have abubble, you'll have inflation.You'll also have a lot ofactivity for a while. But theprinting of money results inthe decline in the value ofmoney.It'sverysimple.”

“Whatwewanttohaveisthenormalgrowththatcomesoutof an economywhere people

are finding more and morethings to do that please youandme in terms of what webuy.”

“IfyougoonCNBCandsaythatbondsarekindofapoorinvestment,youknowpeopledon't get mad at you; youdon't even hear from theTreasury. I mean, all right,you can knock almost anyinvestment and people may

geta little irritated,butwhenyou talk about gold - and ofcourse that says somethingabout their motivations forownership-theywantpeopletoagreewiththem.

“They want people -everybody - they wanteverybody to get so scaredthey run toacavewithgold.And caves might be a betterinvestmentthangold.Imean,

at least they're not producingmore caves all the time. Sothey want people to be asafraid as they are becausethat'swhat'sgoingtoproduceanincreaseinprices.

“Incidentally, they're right tobe afraid of paper money. Imean, they have a very—theirbasicpremisethatpapermoney around the world isgoing to get worth less and

less and less over time isabsolutelycorrect.”

“The one thing I canguarantee you is not safe, isthedollarinyourpocket,youknow.Thatisgoingtogetorbecome worth less, notworthless,butworthlessovertime.”

“I don't believe in peopletrying to get very rich veryquickly in stocks. They don't

know how to do it, I don'tknow how to do it, nobodyknowshowtodoit.

“And if you get convincedthat you can, you know,you've made a mistake. Buttherearelots,thereareplentyofgoodbusinessesthatifyoubuy them, you'll have a veryhigh probability they'll beworthmoremoney in fiveor10or20years.

“And Berkshire's one ofthose.Butitisn'tthebestone.Imean,thechancesofgettinga bad result at Berkshire isveryslight,andthereforeyoucan have, in my view, youcanhaveahigherpercentageofyourmoneyinBerkshireifyou're willing to be satisfiedwith a modestly better thanaveragereturn.

“And I havemembers ofmy

family,youknow,mysistersand cousins that have 80 or90 percent of theirmoney inBerkshire. I'm notuncomfortable with that. Buttheydonot expect to get thekind of results out ofBerkshire in the future thatthey'vegotteninthepast,andtheywon't.”

Berkshirevs.GoldThisiswhatBuffetthadtosayaboutgoldasaninvestmentinMay2012onSquawkBoxTV.“WhenwetookoverBerkshire,Berkshirewassellingat$15ashareandgoldwassellingat$20anounce.Goldisnow1600andBerkshire's120,000.Butyoucantakeabroaderexampleofthat.If

youbuyanounceofgoldtodayandyouholdit100years,youcangotoiteverydayandyoucouldcootoitandyoucancaressitandyoucanfondleitand100yearsfromnowyou'llhaveoneounceofgoldanditwouldn'thavedoneanythingforyouinbetween.

“Ifyoubuy100acresoffarmland,itwillproducefor

youeveryyear.Youcanusethatmoneytobuymorefarmland;youcandoallkindsofthings.For100yearsit'llproducethingsforyouandyoustillhave100acresoffarmlandattheendof100years.

“YoucouldbuytheDowJonesindustrialaveragefor66atthestartof1900.Goldwasthen$20.Attheendit

was11,400.Butyou'dhavegottendividendsfor100years.Soaproductiveassetofanykind,adecentproductiveasset,isgoingtokillanon-productiveassetovertime.Now,inanygivenone-yearperiod,five-yearperiod,anyassetcanoutperformanotherasset.”

BuffettinAustraliaIn its report for the threemonths to June 2012,BerkshireHathaway revealedthat it held Australian bondsas part of the fixed interestsecurities backing itsinsurance businesses,including huge re-insurancearms,andsomeofitsfinanceproducts. It also holds thebonds of four other AAA-

rated countries includingGermany and the UK. Thebonds of these five countriesmake up 80 percent of theinvestment in foreign fixed-interest securities. OneAustralian media outletgushingly reported, “WarrenBuffett has opted to investheavily in Australia's top-ratedgovernmentbondsasheseeks a stable backstop forBerkshire Hathaway. And

more purchases may be ontheway.

“Forthefirsttime,oneoftheworld's major insurers,Warren Buffett's BerkshireHathaway,has revealed itselfas a fan of Australiangovernmentbonds,especiallytheirAAAcreditrating.

“With General Re andBerkshire active inAustralia,it's logical they hold

Australiangovernment bondsin their portfolios. But theimportanceof theAAA-ratedholdings to Berkshire hasincreased. It seems even thelegendary Warren Buffettneeds to assure investors,analysts and regulators thathishugeinsurancebusinessisbacked by some of the bestquality government debtaroundtheworld.”

Berkshire Hathaway are bigglobal re-insurers and dealwith Australian companiesincluding Suncorp. Berkshirealso has a 3 percent holdinginanotherglobalre-insurerinSwiss Re. General Re hassignificant operations inAustralia (it earned a lot ofpublicity following the HIHcollapse in the earlyyearsofthe past decade for beingmixedupwithHIHandFAI).

IfMoody'sfollowsonwithitsthreattocutthecreditratingsof a group of countriesincluding Germany,NetherlandsandLuxembourglaterthisyear,thenitislikelythat Berkshire will be forcedto expand the size of itsAustralianbondsholdings.

BuffettonPeople“Wehave270,000peopleworkingatBerkshire,andit'salittleearlyinthemorning,butIwillguaranteeyouthatduringtherestoftheday,atleast,somepeoplewillbedoingsomethingwrong.Imean,it'sthethingthatscaresthedickensoutofmeastheCEO,becauseyoucan'thave270,000peoplewithout

somebodydoingsomethingwrong.Peoplearejustnotthatcarefulnomatterwhatinstructionsyougive.

“ThethingIworryaboutatBerkshireisthatwith270,000people,somebody'sdoingsomethingwrong.I'llguaranteeyouthey'redoingsomethingwrongtoday.Imean,wewillprobablyhave10people,maybe20people

doingsomethingtheyshouldn'tbedoingtodayatBerkshire.

“WhatIhopeisthatwefindoutaboutit,thatit'sminorandIcertainlyhopethatwehearaboutitandgetit,youknow,getitcorrected.Butyoucan'thaveahugeorganization-anybodythatrunsahugeorganization,Idon'tcarewhetherit'sa

churchoranarmyorapoliticalorganization,agovernmentaldepartment.

“Imean,that'swhathauntsyouisthatdownthelinepeoplearedoingthingsthat,youknow,they'renotsupposedtobedoingandyouhavevariousmethodstotryandkeepthatundercontrol.You'llnever—you'llneversolveit100percent.You

havetomakesurewhenyoudofindoutaboutit,youdosomethingaboutit.

“Wewanttohavepeoplethatmatchourprinciplesandnotprinciplesthatmatchourpeople”

4.BUFFETTDEALSWe all are learning,modifying, ordestroyingideasallthetime. Rapid

destruction of yourideaswhen the time isrightisoneofthemostvaluable qualities youcanacquire.Youmustforce yourself toconsider argumentsontheotherside.

CharlieMunger,

BerkshireHathaway

Coca-ColaIn 1988, Buffett startedbuyingCoca-Colashares.Hisold neighbour, now thePresident of Coca-Cola,noticedsomeonewas loadingup on shares and becameconcerned. After researchingthe transactions, he noticedthe trades were being placedfrom the Midwest. Heimmediately thought of

Buffett and called him.Buffettconfessedtobeingtheculpritandrequestedtheynotspeak of it until he waslegally required to disclosehis holdings at the 5%threshold.

Within a few months,Berkshire owned 7% of thecompany, or $1.02 billiondollarworthof stock.Withinthree years, Buffett's Coca-

Cola stock would be worthmore than theentirevalueofBerkshire when he made theinvestment.

In 1988,Wall Street thoughtCoca-Cola was anunattractive stock to buy.Conversely Warren Buffettthought it was a wonderfulbusinesstoown.

In 1988 Coca-Cola was thecompany in the beverage

industry, and in theworld. Itdominated the market andhad no serious competition.Even today in Australia,Coca-Cola has more shelfspace than almost any otherproduct on supermarketshelves.

During 1988 and 1989,Buffettacquiredmorethan$1billion worth Coca- Cola(KO) shares. At the time,

Wall Street thought he wasdownright crazy.Wall Streetscrutinized the purchase anddeducedthatBuffetthadpaidway too much for earningsandthestockpricewashigh,having increased by 18% ayearforeightyears.

Wall Street thought Buffettwas crazy. In 1987, Coca-Cola earnings were downnearly 2% from their 1986

peak,surelynot thesignofagrowing company! With aprice-to-earnings(PE)ratioof14 to 19, the companyseemed fairly valued at best,ifnotovervalued.

Buffett showed the world,again, why Wall Street’searningsmeannothing to thebusiness investor, how toinvest like a business owner,and why you are right when

your data and reasoning areright thus not depending onwhether the crowd agrees ordisagrees. BerkshireHathawayhas paid a total of$1.3 billion to acquire its8.6% stake in Coke over theyears.Inhindsighttheresultsspeakforthemselves.

Today, Buffett’s stock inCoca-Colaisworthmorethan$10 billion. In 2011, Buffett

advised, ‘we (BerkshireHathaway) will almostcertainlyreceive$376millionfromCokeindividends.’Notbad, considering how easy itwas to find the value in this“no-brainer” investment.Let’s look at the reasoningbehindBuffett’smostfamouspurchase. The Cash Cow.From 1978 through 1987,Coca-Cola’s Free Cash Flowgrew at a median rate of

21.8%ayear.Buffetthimselfsays we should not takeyearly results too seriously,so we focus on multi-yearresults. Then again, Coca-Cola’s Free Cash Flow grewquite steadily each year - adefiniteplus!

The NetWorth. Coca-Cola’sShareholder Equity had beengrowing by around 7.8% ayear. Not startling by any

means, but it was consistentandpredictable-imperativeinthe Buffett approach toinvesting.Thegrowth rateofShareholder Equity becomescritically important onlywhen you expect yourcompany to close up shop inthenexttwentyyears,clearlynot something Coca-Colaintendsondoing.

Management and Money.

Coca-Cola had a medianCash return on investedcapital (CROIC) of 9.3% fortenyears.Foreverydollarofcapital invested in thecompany, Coca-Cola wasgenerating $0.09 of cash.Many investors prefer to seeCROIC above 13%; anylower and the numbersbecomefragile,thoughCoca-Cola was a special situationbecause of its brand and

moat. In 1988, Coca-Colawasanythingbutfragile.

One of Buffett’s investmentdictums is for businesses tohave a moat. “What reallycounts is the presence of acompetitive advantage. Youwant a business with a bigcastle and a moat around it,and you want that moat towiden over time. Coke hasbeenbuilding itsmoat for20

or 25 years. We want aneconomiccastle."

In 1988, investors have beenhard pressed to find a morewell-knownnamethanCoca-Cola.Now that ismoat. TheValuation. Assuming thecompany could continue togrow Free Cash Flow at21.8% a year for ten years,and then slowed to 5%thereafter. So, assuming

Buffett wanted a 15% ormore average annual return,youcouldvalueCoca-Colaat$22.3 billion, or $59.16 ashare in 1988. The $22.3billion is made up of $2.09billion of ShareholderEquityand the net present value ofthe estimated $98.89 billionof future cash flow,discounted at 15% for ahandsomereturn.

The Purchase. Manyinvestors work on the theorythat you shouldn’t pay fullpriceforacompany,evenforoneas solid asCoca-Cola. Ifthe future is a little less rosythan you projected, yourreturns will suffer. So, youneed a discount. Being anindustry leader (the industryleader), Coca-Cola couldhave been purchased with aslittle as a 25% Margin Of

Safety discount. At a 25%discount to value, Coca-Colacouldhavebeenpurchasedatany timeat orbelow$44.37.In1988,thecompany’sstocktraded between $35 and$45.25, giving Buffett adiscount between 24% and41%.

BuffettonCoca-Cola.Fromthe1993BerkshireHathawayShareholderLetter:

“Let me add a lesson fromhistory: Coke went public in1919at$40pershare.Bytheend of 1920 the market,coldly re-evaluating Coke'sfutureprospects,hadbatteredthestockdownbymore than50%, to $19.50. At year end

1993, that single share, withdividends reinvested, wasworthmorethan$2.1million.

“AsBenGrahamsaid:"Intheshort-run, the market is avotingmachine - reflecting avoter-registration test thatrequires only money, notintelligence or emotionalstability-butinthelong-run,the market is a weighingmachine."

Later in the letter, Buffetthighlights a 1938 Fortunearticle. The writer of thearticle implies that it wasalreadytoolate,backin1938,tobenefitfromtheownershipofCoca-Cola'sstock:

“In1938,morethan50yearsafter the introduction ofCoke,andlongafterthedrinkwas firmly established as anAmerican icon, Fortune did

an excellent story on thecompany. In the secondparagraphthewriterreported:"Several times every year aweighty and serious investorlookslongandwithprofoundrespectatCoca-Cola'srecord,but comes regretfully to theconclusion that he is lookingtoo late. The spectres ofsaturation and competitionrisebeforehim.”

“Yes, competition therewasin1938 and in 1993 aswell.But it's worth noting that in1938TheCoca-ColaCo.sold207 million cases of softdrinks(ifitsgallonagethenisconverted into the 192-ouncecases used for measurementtoday) and in 1993 it soldabout10.7billioncases,a50-fold increase in physicalvolume from a company thatin1938wasalreadydominant

initsverymajorindustry.

“Nor was the party over in1938foraninvestor:Thoughthe $40 invested in 1919 inonesharehad(withdividendsreinvested)turnedinto$3,277by the end of 1938, a fresh$40 then invested in Coca-Colastockwouldhavegrownto $25,000 by year end1993.” With that in mind,consider how often layers of

complexity and cost areaddedtotheinvestingprocesswhen a perfectly sound andstraightforwardoptionisrightthereinfrontofyou.

InvestmentMethodology:WhatQuestionsWouldWarren

BuffettAskToValueCoca-Cola(oranyotherbusiness)?

1. Does the company sellbrandnameproducts that arelikelytoendure?

2. Is the business of thecompanyeasilyunderstood?

3. Does the company investin and operate businesseswithinitsareaofexpertise?

4.Doesthecompanyhavetheabilitytomaintainorincreaseprofitabilitybyraisingprices?

5.Is thecompany, lookingatlong-term debt, and thecurrent position,conservativelyfinanced?

6. Does the company showconsistently high returns onequityandcapital?

7. Have the earnings pershare and sales per share ofthe company shownconsistent growth abovemarketaveragesoveraperiod

ofatleastfiveyears?

8. Has the company beenbuyingbackitsshares,andifso, has it bought themresponsibly?

9. Has management wiselyused retained earnings toincrease the rate of return toshareholders?

10. Is the company likely torequire large capital sums to

ensure continuingprofitability?

NebraskaFurnitureMartIn1983,accordingtowhatisnowfolklaw,BuffettwalkedintoNebraskaFurnitureMart,the multi-million dollarfurniture retailer built fromscratchbyRoseBlumpkin.

Speaking toMrs. B, as localresidents called her, Buffettasked if she would be

interested in selling the storeto Berkshire Hathaway.Blumpkin's answer was asimple "yes", to which sherespondedshewouldpart for"$60 million". The deal wassealed on a handshake and aone-page contractwas drawnup. The Russian-bornimmigrant merely folded thecheque without looking at itwhen she received it dayslater.

BuyInAdversityWarren Buffett has madesome of his best buys whensolid companies haveexperienced highly-publicized problems. He hascorrectly predicted theywould work through thetrouble, and they ultimatelymade billions when theyrecovered.

ThefirstwastheGreatSalad-

Oil Scandal. In the early1960s, a commodities mogulwas taking out big loanssecured by what he claimedwere giant inventories ofsaladoilstoredinwarehousesowned by American Expressin Bayonne, New Jersey. Asit turned out, the tankscontainedmostlywater,withsalad oil floating on top asdisguise. Shares of AmExplummeted by 50 percent.

How bad was this problem?To find out,Buffett spent anevening with the cashier atRoss'sSteakHouseinOmahaseeing if people would stopusing their Amex cards. Thescandal didn't seem to giveany customer indigestion, soBuffettseizedtheopportunityto buy 5 percent of thecompanyfor$13million.

Buffett pounced, and

multiplied his investmentfive-fold in five-years for a$20 million profit. Manyyearslater,Buffettthoughthesawthesamepatterninabigcompany thatmany investorsreviled more than any other:BankofAmerica(BofA).

Buffett asked hisadministrative assistant tofind CEO Brian Moynihan'sphone number. When he

reached Moynihan at theenvironmentally-friendlyBank of America Tower inmidtown Manhattan, Buffettproposed a deal that wasrelatively light on dividendsand heavy on warrants andwould produce enormousgainsifBofArecovered.

Moynihan, an experienceddealmaker from his daysmakingacquisitionsforFleet,

wantednear-totalsecrecy.Hedeclined to bring ininvestment bankers, didn'tconsult with lieutenants, andinitially discussed the dealonly with his chairman,former DuPont CEO, ChadHolliday.

The board voted by phoneearlyonaThursdaymorningand approved the deal thathad taken just 24 hours. In

exchange for the Buffettbrand name and $5 billion,the Charlotte, N.C. financialinstitution granted WarrenBuffett the option to buy upto 700 million of its sharesanytimein thenext10yearsfor$7.14.

Buffett earned $357 millioninpaperprofitsthatThursdaysimplyonwarrants related tohis $5billion equity infusion

into Bank of America. Notbad for a day's work. Fundmanagers andanalysts fearedthatBankofAmericaneededto raise lots of additionalcapital by selling shares, atextremely low prices. Theybelieved the bank lacked thefinancialstrength tocover itsbig exposure to troubledmortgages. The TV talkingheads,disappointedinvestors,and even investment bankers

within BofA who receivedbonuses in shares and werewatching it collapse, took adim view of its future andMoynihan'sleadership.

Buffett tookadifferentview:Berkshire wouldn't haveinvested inBofAif itneededhis money. The Berkshirechairman reckons that thebankwouldwork through itscurrentproblems,andthatthe

underlying banking businesswill prove highly profitable.If Moynihan's claim thatBofA will earn as much as$25 billion in a few yearsproves correct, Berkshire'sprofits will exceed $10billion.

GoldmanSachsBuffetthasahistoryofbeinga lifeline for well-knowncompanies at time offinancialstress.Hemadea$5billion investment inGoldmanSachsinSeptember2008 at the height of thefinancialcrisis.

Buffett’sBerkshireHathawaytookadvantageoftheturmoilin the markets to make a

shrewd $5 billion investmentwith a strong 10% dividendyield in the beleaguered butbest-run major Wall Streetsecurities firm, GoldmanSachs.

Berkshire also receivedwarrants to buy $5 billion ofGoldman common stock at$115 a share, $10 belowGoldman's share price whenthe deal was announced.

Within a week Goldmanissued another $5 billion incommonstock.Bytheweek'send,Goldmanraiseditspriceto around $137 a share,making Buffett's deal evenmore attractive. Berkshirewas to receive $500 millionin annual dividends on thepreferredshares,whichistax-advantagedforacorporation.Preferredstock,whichpaysafixed dividend but rarely

fluctuatesmuchinvalue,actsmore like a bond than atypical common stock.Holders of preferred sharesalso are paid off ahead ofcommon-stock holders if acompanyisliquidated.Unlikemost preferred, which arecallable after five years, theGoldman preferred held byBerkshirecanberedeemedatany time at a 10% premium.This gives Goldman

flexibilitytopayofftheissueifitcanobtainmoreattractivefinancing later in a calmermarket. If the issue is paidoff,Berkshirewillneta$500million profit. Goldmanprobably could have done abetter deal by selling $5billion of convertiblepreferred stock in the openmarket or to a group ofprivate-equityfirms.

For Goldman, the allure ofthis deal was the imprimaturthat comes from WarrenBuffett. With Buffett sayingthatapreferredinvestmentinGoldman is safe, Goldman'slendersandthosewithwhomit trades were surely to bereassured.

This undoubtedly helpedGoldman finance its $1trillion balance sheet, even

thoughMr.Buffett'spurchaseis expected to reduceGoldman's earnings. Thefive-year Goldman warrantsare very valuable. Berkshiregets an opportunity to buyGoldman stock at half its2007 peak and for a smallpremium to the firm's bookvalue of around $100 pershare. In mid-2011 GoldmanSachs Group Inc announcedthat it would buy back $5

billion worth of preferredstock from Buffett, ending acostly deal that helped shoreup confidence in the bank atthe height of the financialcrisis.

Goldman paid a 10 percentpremium to buy back theshares, as well as accruedunpaid dividends, and a one-time preferred dividend of$1.64 billion. Buffett

lamented the likelyredemption of the shares inhis 2011 annual letter toshareholders.

"GoldmanSachshastherightto call our preferred on 30daysnotice,buthasbeenheldback by the Federal Reserve(bless it!), whichunfortunatelywill likely giveGoldman the green lightbeforelong."

The Buffett transaction alsogrants Berkshire warrants topurchase 43.5 millioncommon shares at $115 pershare through 2013.Followingtheannouncement,Goldman shares rose 2.7percenttocloseat$159.96onthe New York StockExchange.Berkshire'sclassAshares advanced 0.5 percentto $124,700 and its class Bshares rose 0.9 percent to

$83.48. The preferred sharescarriedanannualdividendof10 percent, thus buying backthe securities will save theinvestment bank about $500million a year. The annualdividend to Berkshiretranslated into $1.4 millionper day, $951.29 per minuteand$15.85persecond.

GeneralElectricA month after the GoldmanSachs deal Buffett invested$3billion inGeneralElectric(GE) after the stock hadfallen 42 percent in the pastyear.ThedealcostsGEabout$300millioneachyear.Afterannouncing his investmentBuffett praised GeneralElectric.“GEisthesymbolofAmerican business to the

world,” he said in astatement. “Theyhave strongglobal brands and businesses...IamconfidentthatGEwillcontinue to be successful intheyearstocome.”

Analysts said Buffett’sendorsement will mean asmuch or even more thanBerkshire’s cash. “He’s asmart guy and he wouldn’tget involved if he doesn’t

think it’s a great company,”said one analyst. “It’s a niceendorsement. He doesn’tmaketoomanymistakes.”

Anotheranalystsaid,“Ithinkthey’re kind of a win-winsituation: great deals forBerkshire and good deals forthe other companies. I thinkinalotofways,Goldmanandcertainly GE, they’re, ineffect, buying Buffett’s

backing. Companies arewilling to accept his capitalon better terms than capitalfrom anyone else because ofthe market psychology ofhaving Warren Buffettinvestingintheircompany.”

WhenGE paid Buffett back,they owed him 10% morethanhepaid,or$300millionon top of his $3 billionpayback. Plus, Buffett will

have accumulated $900million in cumulativedividends.Allsaidanddone,Buffett’s $3 billioninvestmentinGEgeneratedatotalprofitof$1.2billion.

SwissReinsuranceCoBuffett made a similarinvestment in SwissReinsurance Co after it raninto financial difficulty.Buffett made the investmentafter Swiss Re’s strategy oftrading securities such ascredit-default swaps led torecordwritedownsandlossesof$8.3billionin2008.Swiss

Re is repaying Berkshireaheadofscheduleafterprofitalmost doubled in the thirdquarter and the reinsureraccumulatedexcesscapitalof$10 billion by the end ofJune. It was announced thatBuffett’s two-year return onhis Swiss Reinsurance Coinvestment in the Zurich-based company may exceed$1.3billion, ormore than40percent of the funds he

injected, when the reinsurerrepaid Berkshire HathawayInc. in January 2011.Berkshire was to receive a“premium” of 600 millionSwiss francs ($623 million)on the 3 billion francsinjected into the world’ssecond-biggest reinsurer.Interest payments of 12percent a year on theconvertible notes purchasedinFebruary2009addedupto

about 700 million francs,accordingtoSwissRe.

A10to1,000Bet

In2003,PepsipaidBerkshire$10million to insure againsta contest Pepsi held whichhad a potential $1 billionprize. The prize had a verysmall chance of being wonand it was not won byanyone.

TheBuffettBudgetLike every regular person,when Buffet goes shopping,hehas a budget. It's just thatBuffett's budget is $20billion. At the 2012 AGM,Buffett said he recentlyconsidered and then passedon a $22 billion acquisitionbecause he didn't have thecashonhand.

DowChemicalBuffett'sBerkshireHathawaygroup emerged as a leadingshareholder in DowChemical, after backing theglobal combine's near-$19billion acquisition of aspeciality chemical business,Rohm and Haas. The deal,announced in July 2008,markedakeystepintheplanof Dow chief executive

AndrewLiveris tomove intohigher-margin specialitychemicals, which are lesscyclical than bulk chemicals,where Dow is among theglobal leaders. BerkshireHathawayprovided$3billiontowards the financing whilethe Kuwait InvestmentAuthority was to put up $1billion. The preferred sharespay an 8.5 percent annualdividendtoBuffett,whilethe

yield is about 4 percentagepoints higher than that onDow’s 30-year notes due in2041.

RohmandHaasmakearangeof special chemicals forconstruction, electronics,paper and water treatment.Dowpaid$78ashare,whichcomparedwithaclosingpriceof $44.83 on the New YorkStock Exchange at the time.

The offer valued Rohm andHaas' equity at $15.3 billionbut also involved taking on$3.5 billion of Rohm andHaas debt. Stripping out thedebt, the deal was the thirdlargest ever in the chemicalssector.

In addition to the fundingfrom Berkshire and Kuwait,through convertible preferredsecurities, Dow had also

arranged $13 billion of debtfinance through Citigroup,Morgan Stanley and MerrillLynch. However, by January2009 the deal with Kuwaithad collapsed and Dow’smarketvaluewas$14billion,meaninginvestorsthoughtthecompany was worth at least$1 billion less than the priceitwastopayforRohm.

Meanwhile, Liveris had to

find $7.5 billion to replacefundsthathadbeenpromisedinDow’snow-collapsedjointventurewithKuwait. In July2012 it was announced thatDow stands to receive $2.16billion from Kuwait aspenalty fees for havingcancelled the agreement tobuyapartoftheDow-ownedplasticsbusinessin2008.

As a result, Buffett and

Berkshire Hathaway, whoown around $3 billion inpreferred shares and another$1 billion that was sold toKuwait, will stand to gainsubstantially. While the fineprint has yet to be workedout, payment is expectedsome time in 2013, completewithinterestandotherfees.

During the Rohm & Hasspurchase, Dow made use of

Buffett’s help to the tune ofsome$16million.Ifitwants,BerkshireHathawaycannowexchange its preferred shareholdings for 72.6 millionshares of Dow’s commonstockworth$41.32pershare.

LubrizolCorporationIn March 2011, BerkshireHathaway and The LubrizolCorporation announced adefinitive agreement forBerkshire Hathaway toacquire 100% of outstandingLubrizol shares for $135 pershare in an all-cashtransaction. The transaction,which was unanimouslyapproved by the board of

directorsofeachcompany,isvalued at approximately $9.7billion, making it one of thelargest acquisitions inBerkshire Hathaway history.This transaction wasapproved by Lubrizol’sshareholders and finalized inSeptember2011.

Lubrizol supported the wareffort in the 1940’s, andgovernment authorities

credited Lubrizol withproducing more than half ofthe engine oil additives andabout 80% of the gearlubricantadditivesrequiredinAlliedmilitaryoperations.

Lubrizol saw an opportunitywith the 1974 petrol crisisand turned its attention toadditives to improve totalvehicle economy and alsointroduced super high

performance diesel oiladditives and fuel savingmultigradegearoiladditives.

In the 1990s, Lubrizol beganthe supply of lubricantadditivestoChinathroughitsjoint venture facilities inTianjin and Lanzhou.Lubrizol overcame thedifficulties of the GFC in2009 to become one of thefew chemical companies to

producerecordearnings.

NewspapersAt the 2012 AGM, Buffettsaid he might turn into anewspaper baron. In 2011hebought the Omaha World-Herald, and says thatacquisition has worked outwell and told the audiencethat he is thinking of buyingmore newspapers.Newspapers, according toBuffett, can be a good

businessas longasyoudon'tgivethemaway.ShortlyafterthatAGM,Buffett'scompanyBerkshire Hathawayannouncedadealtopurchase63 newspapers from MediaGeneral -- despite Buffettrecently referring to it as a"declining industry withproblems."AttheAGMwhena member of the audienceaskedhimhowtodealwithadeclining industry, Buffett

replied, "Generally it pays tostay away from decliningbusinesses. [The] newspaperbusiness is a decliningbusiness and we will pay apricetobeinthat.Thatisnotwhere we will make realmoney at Berkshire." Butspeakingaboutthenewspaperindustry in general, Buffettalso said, "I think theeconomicswillworkoutOK.It'snothing like theolddays,

but I think it will work outOK."

Buffett also said thatnewspapers have "lostprimacy," though he addedthat "theyare stillprimary inagreatmanyareas.Theystilltell me something primarythatIcan'tfindelsewhere."

Berkshire Hathaway said itwill purchasemost ofMediaGeneral's daily and weekly

newspapers for $142 millionincash.Separately,BerkshireHathaway signed a creditagreement with MediaGeneral for a $400 millionterm loan and a $45 millionrevolving credit line. "Intowns and cities where thereis a strong sense ofcommunity, there is nomoreimportant institution than thelocal paper," said Buffett, aformer paper boy. Berkshire

Hathawayannouncedanothernewspaper purchase in June2012 saying that they willacquire two Texas dailynewspapers.

Buffett,MarsandWrigleysBuffett's role in Mars' $23billion purchase of chewinggumcompanyWrigley:

In 2008 closely held MarsInc.with $4.4 billion in debtfinancing from Buffett andBerkshireHathawayacquiredU.S.chewinggum iconWm.Wrigley Jr. Company, in a

deal valued at $23 billion.When the deal closed,Wrigley became a separateMarssubsidiary.

At the time Buffett said,"There's really nothing thatcangowrongwithsomethinglike the Wrigley and Marsbrands. People are eatingmore and more of theirproducts every day." Marspaid $80 per share for

Wrigley in an all-cash deal,which represented a 28%premium over Wrigley's lastclosingpriceof$62.45.Withthe bid from Mars, Wrigleyshares shot up 23%, gaining$14.46 per share on the nexttrading day, thus closing at$76.91.

"It's a great price.Nobody isgoing to paymore than that.Whoisgoingtogoupagainst

Mars and Buffett?"commentatorsobserved.Theyalso noted that in typicalBuffett style there waspossibly a lot more to thedeal. By helping Mars buyWrigley,Buffettmayactuallybe helping himself: As one,big privately held entity, themerged Mars-Wrigley giantwould be much easier forBerkshire to buy outrightshould the secretive family

that runs the business everdecidetosellit,sourcessaid.The Mars-Wrigley mergerbought together two all-starconfectioners. Wrigley'sbrands include the JuicyFruit, Orbit and Eclipsegums, Life Savers hardcandies and Altoids mints.Mars is vending-machineroyalty in its own right,withbrands suchasM&Ms,TwixandSnickers.

In addition to providing thedebt financing, Buffett'sBerkshireHathawayInc.wasto make a minorityinvestmentinWrigleyvaluedat $2.1 billion. It wasbelieved that Buffett got adiscount on the Wrigleystake.Once theMars buyoutof Wrigley is concluded,Buffett will own a piece ofthechewing-gummaker.Thefinancing package included

$4.4 billion in subordinateddebt fromBerkshire, and the$2.1 billion investment fromBerkshire – payable at thetimethedealclosed.

Buffett favours companiesthat have a competitiveadvantage, offering productsorservicesthatcan'teasilybereplicated by rivals.Businesses like Mars andWrigley, which have strong

consumer brands, fit the bill.This move by Berkshire andBuffettwasjustthelatestinastring of deals around thattime for Buffett. OthersincludeastakeinKraftFoodsand GlaxoSmithKline PLC,Europe's largest drug maker.Buffettalreadyownedahigh-quality confectioner, See’sCandies, a specialty WestCoast chocolate-and-candymaker that was founded in

1921andacquiredbyBuffettin 1972. Sales were $30millionandpre-taxprofitwaslessthan$5millionthatyear.In 2007, the San Francisco-based See's earned $82million on revenue of $383million.

In his most recent letter toBerkshire shareholders,Buffett attributed"extraordinary results" down

to See's "durable competitiveadvantage." See's isrepresentative of the kind ofcompanies that Buffett likestoownoperationssuchastheNebraska Furniture Mart, orBorsheim's Fine Jewellery,which are highly profitableand display strong growth,yet somehow manage tomaintainthe"feel"oftheold-time sole-proprietorshipshopsthatusedtooccupythe

downtown "Main Street"business district in everysmalltown.See'sCandiesisareally solid example of thatkindofacquisition.

BoysToysMost young boys loveplaying with a train set andhaveafascinationwithtrains,but would never dream ofowning a railroad. Buffett,who is known for hispreference for oldertechnologies like trains,upstaged any train enthusiastwith his purchase ofBurlingtonNortherninMarch

2009 when BerkshireHathaway agreed to buyBurlingtonNorthernSantaFeCorp., making a $34 billionbet on the future of theU.S.economy. BurlingtonNorthern,thenation'ssecond-largestrailroad,isthebiggesthauler of food products likecorn, and coal for electricity,making it an indicator of thecountry's economic health.Therailroadalsoshipsalarge

amount of consumer goods— including items importedfrom Asia — from bigWestern ports like LosAngeles and Seattle. It wasthe biggest acquisition everforBerkshireHathawayatthetime. Analysts said Buffettwas planting both feet in anindustry that is poised togrow as the economy getsback on solid ground.Berkshire Hathaway already

owned about 22 percent ofBurlington Northern, andpaid$100ashareincashandstock for the rest of thecompany. That was a 31.5percent premium onBurlingtonNorthern'sclosingprice on the day before thedeal.Onthedaythedealwasannounced the stock shot upover 28 percent to $97.66 inafternoon trading.Shareholders had the option

to convert their stock for acash payment of $100 pershare or receive BerkshireClassA or Class B commonstock.Upto60percentofthedealwascashand40percentwasinstock."Berkshire's$34billioninvestmentinBNSFisa huge bet on that company,CEOMattRoseandhisteam,and the railroad industry,"Buffett said in a statement."Most important of all,

however, it's an all-in wagerontheeconomicfutureoftheUnited States. I love thesebets,"hesaid.

By February 2012 Buffett’sall-inwagerhadprovedtobeaverygoodbetontheUSoilindustry as well. BurlingtonNorthern Santa Fe’s tracknetwork puts it among thebest situated of its peers tomeet shipping demand for

frackingsand,pipeandcrudeoilinthenorthernUSBakkenregion, where oil productionhas more than tripled since2008. Gains in mineral andchemical carloads helpedBurlingtonNorthernpaya$1billion distribution toBuffett’sBerkshireHathawayInc. in early 2012. Therailroad is the busiest in theU.S. in 2012 by traffic,positioningittobuildona16

percent jump in 2011 salesthat helped narrow therevenueleadofUnionPacificCorp.,whichlackstracksintotheBakkenarea.

Oneanalystsaid,“It’skindoflike if somebody discoversgoldinyourbackyardbutnotyour neighbour’s. It’s justgood luck.” Good luck or atypical, well researchedBuffettinvestment?

5.THEBUFFETTLEGENDI’m a betterbusinessmanbecauseI

am an investor and abetterinvestorbecauseIamabusinessman.Ifyouhavethementalityof both, it aids you ineachfield.

WarrenBuffettWhen he was only six yearsold, Warren Buffettpurchasedsix-packsofCoca-

Cola from his grandfather'sgrocery store for twenty fivecents and resold each of thebottles for five cents,pocketingafivecentprofit.

At eleven years old, hepurchased three shares ofCities Service Preferred at$38pershareforbothhimselfand his older sister, Doris.Shortly after buying thestock, it fell to just over $27

per share. A frightened butresilient Buffett held hissharesuntiltheyreboundedto$40.Hepromptlysoldthem-a mistake he would sooncometoregret.CitiesServiceshot up to $200. Theexperience taughthimoneofthebasiclessonsofinvesting:patienceisavirtue.

In 1947, at age seventeenBuffett graduated from High

School. It was never hisintention togo to college;hehad already made $5,000delivering newspapers,equivalent to around$75,000now.His fatherurgedhim toattend the Wharton BusinessSchool at the University ofPennsylvania. He stayed fortwo years, complaining thathe knew more than hisprofessors. When his fatherwas defeated in the 1948

Congressional race, WarrenreturnedhometoOmahaandtransferred to the Universityof Nebraska-Lincoln.Working full-time, hemanaged to graduate in onlythree years. Buffettapproached graduate studieswith the same resistance hedisplayeda fewyearsearlier.He was finally persuaded toapply to Harvard BusinessSchool, which, in the worst

admissiondecisioninhistory,rejected him as "too young".Slighted, he applied toColumbia where famedinvestors Ben Graham andDavid Dodd taught - anexperiencethatwouldforeverchange his life. Flyingthrough his graduate studiesatColumbia,Buffettwas theonly student ever to earn anA+ in one of Graham'sclasses.OnedayBenGraham

called, inviting the youngstockbrokerWarrenBuffetttocome and work for him,providinghimtheopportunityhehadlongwishedfor.

Buffett and hiswife rented ahouse in the suburbs ofNewYork and he spent his daysanalysing S&P reports,searching for investmentopportunities. It was duringthis time that the differences

between the Graham andBuffettphilosophiesbegan toemerge. Buffett becameinterested in how a companyworked and what made itsuperior to competitors. BenGraham simply wantednumberswhereasBuffettwaspredominately interested in acompany's management as amajorfactorwhendecidingtoinvest.Grahamlookedonlyatthebalancesheetandincome

statement; he had no interestin corporate leadership.Between 1950 and 1956,Buffett built his personalcapitalupto$140,000fromamere $9,800. With this warchest, he set his sights backon Omaha and beganplanninghisnextmove.

On May 1, 1956, Buffettrounded up seven limitedpartners including his Sister

DorisandAuntAlice,raising$105,000 in the process. Heputin$100himself,officiallycreating the BuffettAssociates,Ltd.

Beforetheendoftheyear,hewas managing around$300,000incapital.Small,tosaytheleast,buthehadmuchbigger plans for that pool ofmoney.Hepurchasedahousefor $31,500, affectionately

nicknamed "Buffett's Folly",andmanagedhispartnershipsoriginally from the bedroom,and later, a small office. Bythis time, his life had begunto take shape; he had threechildren,abeautifulwife,anda very successful business.Over the course of the nextfive years, the Buffettpartnerships racked up animpressive 251.0% profit,while the Dow was up only

74.3%. Somewhat of acelebrity in his hometown,Buffett never gave stock tipsdespite constant requestsfrom friends and strangersalike. By 1962, thepartnership had capital inexcess of $7.2 million, ofwhich $1 million wasBuffett's personal stake.Buffettdidn'tchargeafeeforthe partnership, but he wasentitled to 25 percent of the

profits above 4 percent. Healsohadmorethan90limitedpartners across the UnitedStates. Inonedecisivemove,he melded the partnershipsinto a single entity called"Buffett Partnerships Ltd.",upped the minimuminvestment to $100,000, andopened an office in KiewitPlazaonFarnamstreet.

In 1962, aman by the name

of Charlie Munger movedback from California to hischildhood home in Omaha.Though somewhat snobbish,Mungerwasbrilliantineverysense of the word, havingattendedHarvardLawSchoolwithoutaBachelor'sDegree.

Introducedbymutualfriends,Buffett and Munger wereimmediately drawn together,providing the roots for a

friendship and businesscollaboration that wouldendure for forty years andmore. Ten years after itsfounding, the BuffettPartnership assets were upmore than 1,156% comparedto theDow's 122.9%.Actingas the manager over assetsthat had ballooned to $44million dollars, Buffett andhis daughter Susie's personalstakewas$6,849,936.Ashis

persona of success wasbeginning to be firmlyestablished,Buffettclosedthepartnership to new accounts.TheVietnamWarwasragingin full force and the stockmarket was being driven upby people who hadn'texperienced the depression.WhileBuffettwasvoicinghisconcern for rising stockprices, the partnership pulledits biggest coup in 1968,

recording a 59.0% gain invalue, catapulting to over$104millioninassets.

Next year in May 1969,Buffett informed his partnersthat he was "unable to findany bargains in the currentmarket" and liquidated thepartnership. He spent theremainder of the yearliquidatingtheportfolio,withthe exception of two

companies - Berkshire andDiversified Retailing. Theshares of Berkshire weredistributed among thepartners and a letter in May1969 informed them that hewould, in some capacity, beinvolved in the business, butwas under no obligation tothem in the future. Buffettintendedtoholdontohisownstake in the company and bythen he owned 29 percent of

the Berkshire Hathawaystock.

BuffettGainsControlofBerkshireHathawayBuffett's role at BerkshireHathaway had actually beensomewhat defined yearsearlier. On May 10, 1965,after accumulating 49% ofthe common stock, Buffettnamed himself Director.Terrible management hadalmost run the company into

the ground, and he wascertain that with a bit oftweaking, it could run better.He immediately made KenChace President of thecompany, giving himcomplete autonomy over theorganization. Although herefused to award stockoptions on the basis that itwas unfair to shareholders,Buffett agreed to co-sign aloan for $18,000 for his new

President to purchase 1,000shares of the company'sstock.

Two years later, in 1967,Buffett asked NationalIndemnity's founder andcontrolling shareholder JackRingwalt to his office.Whenasked what he thought thecompany was worth,RingwalttoldBuffett-atleast$50pershare,a$17premium

aboveitsthen-tradingpriceof$33. Buffett offered to buythe whole company on thespot - a move that cost him$8.6 million dollars. Thatsameyear,Berkshirepaidouta dividend of 10 cents on itsoutstanding stock. It neverhappened again; Buffett saidhe "must have been in thebathroom when the dividendwasdeclared".

In 1970, Buffett namedhimself Chairman of theBoardofBerkshireHathawayand for the first time, wrotethe letter to the shareholders.That same year, theChairman's capital allocationbegan to display hisprudence; textileprofitswerea pitiful $45,000, whileinsurance and bankingbrought in $2.1 and $2.6milliondollarsrespectively.

Ayearorsolater,Buffettwasoffered the chance to buy acompany by the name ofSee's Candy. The gourmetchocolatemakersold itsownbrand of candies to itscustomers at a premium toregular confectionary treats.The balance sheet reflectedwhatconsumersalreadyknew-theyweremorethanwillingto pay a bit "extra" for thespecial "See's" taste. Buffett

decided Berkshire would bewilling to purchase thecompany for $25 million incash. See's owners wereholding out for $30 million,butsoonconceded.Itwasthebiggest investment Berkshireor Buffett had ever made upuntil then. Following severalinvestments and an SECinvestigation after causing amerger to fail, Buffett andMunger offered to buy the

stock of Wesco, the targetcompany,attheinflatedpricesimply because they thoughtitwas"therightthingtodo".Not surprisingly, thegovernment didn't believethem. Buffett began to seeBerkshire's net worth climb.From 1965 to 1975, thecompany's book value rosefrom$20persharetoaround$95. It was also during thisperiod that Buffett made his

final purchases of Berkshirestock. By then he hadinvested more than $15.4million dollars into thecompany at an average costof $32.45 per share. Thisbroughthisownershiptoover43% of the stock with hiswifeholdinganother3%.HisentirefortunewasplacedintoBerkshire, and with nopersonal holdings, thecompany had become his

soleinvestmentvehicle.

In 1976, Buffett once againbecame involvedwithGeico.The company had recentlyreported amazingly highlosses and its stock waspummelled down to $2 pershare.Buffettwisely realisedthat the basic business wasstill in tact; most of theproblems were caused by aninept management. Over the

next few years, Berkshirebuilt up its position in thisailing insurer and reapedmillions in profits. BenjaminGraham, who still held hisfortune in the company, diedin in September of the sameyear, shortly before theturnaround. Years later, theinsurance giant wouldbecome a fully ownedsubsidiaryofBerkshire.

By late 1970s, Buffett’sreputation had grown to thepoint where a rumour thatWarrenBuffettwasbuyingastockwasenoughtoshootitsprice up by 10 percent.Berkshire Hathaway's stockwas trading at more than$290 a share, and Buffett'spersonal wealth was almost$140 million. The irony wasthat Buffett never sold asingle share of his company,

meaning his entire availablecash was the $50,000 salaryhereceived.Duringthistime,he made a comment to abroker, "Everything I’ve gotistiedupinBerkshire.I'dlikeafewnickelsoutside."

ThispromptedBuffetttostartinvestingforhispersonallife.According to RogerLowenstein's "Buffett", hewasfarmorespeculativewith

his own investments. At onepoint he bought copperfutures, which was anunadulterated speculation. Inashort time,hehadmade$3million dollars. Whenprompted to invest in realestate by a friend, heresponded"WhyshouldIbuyreal estate when the stockmarketissoeasy?"

By 1989, Berkshire

Hathaway was trading at$8,000 a share. Buffett wasnow, personally, worth morethan $3.8 billion dollars.Within thenext tenyears, hewouldbeworthtentimesthatamount. During theremainder of the 1990's,Berkshire Hathaway stockcatapultedashighas$80,000per share. Even with thisastronomical feat, as thedot-com frenzy began to take

hold, Buffett was accused of"losinghistouch".

In 1999, when Berkshirereported a net increase of0.5% per share, severalnewspapers ran stories aboutthe demise of the Oracle.Confidentthatthetechnologybubble would burst, WarrenBuffett continued to dowhathe did best: allocate capitalinto great businesses that

were selling below intrinsicvalue. His efforts did not gounrewarded. When themarkets finally did come totheir senses, Warren Buffettwas once again a star.Berkshire'sstockrecoveredtoits previous levels afterfalling toaround$45,000pershare, and Buffett was onceagain seen as an investmenticon.

TheWitandWisdomofWarrenBuffett“Take me as an example. Ihappen to have a talent forallocating capital. But myability to use that talent iscompletely dependent on thesocietyIwasborninto.IfI'dbeen born into a tribe ofhunters, this talent of minewould be pretty worthless. Ican't run very fast. I'm not

particularly strong. I'dprobablyendupassomewildanimal'sdinner.”

ToBarackObama,quotedinTheAudacityofHope:

ThoughtsonReclaiming

theAmericanDream(2006)

Ifpeoplewanttogivemeties,Iaccept

Buffett was asked by areporter on a TV show,

“Didn't you get a tie fromObama, too? You stole onefrom him, too. I rememberthisstory.Didn'tyouaskhimforone,too?”

Buffett responded, “I didn'task him. I just wore this tiethat looked like it has beenthrough a washing machineand he noticed that threadswere hanging out andeverything and he said, `I

can't let you leave theWhiteHouse looking like that.' Sohegavemeanothertie.Arichguy never has to pay foranything.”

MoreBuffettcomments

“If I was running $1 milliontoday,or$10millionfor thatmatter, I'd be fully invested.Anyone who says that sizedoes not hurt investmentperformance is selling. The

highest rates of return I'veever achieved were in the1950s.IkilledtheDow.Yououghttoseethenumbers.ButIwas investingpeanuts then.It's a huge structuraladvantagenottohavealotofmoney. I think I couldmakeyou 50% a year on $1million.No,IknowIcould.Iguaranteethat.”

“Someone's sitting in the

shadetodaybecausesomeoneplanted a tree a long timeago.”

“Thebusinessschoolsrewarddifficult complex behaviourmore than simple behaviour,butsimplebehaviour ismoreeffective.”

“Americansareinacycleoffearwhichleadstopeoplenotwanting to spend and notwantingtomakeinvestments,

and that leads to more fear.We'llbreakoutof it. It takestime.”

“Beware of geeks bearingformulas.”

“Chainsofhabitaretoolightto be felt until they are tooheavytobebroken.”

“Derivatives are financialweapons of massdestruction.”

“Economicmedicinethatwaspreviously meted out by thecupful has recently beendispensed by the barrel.These once unthinkabledosageswill almost certainlybring on unwelcome after-effects.Theirprecisenatureisanyone's guess, though onelikely consequence is anonslaughtofinflation.”

“I am a huge bull on this

country. We will not have adouble-dip recession at all. Isee our businesses comingback almost across theboard.”

“I am quite serious when IsaythatIdonotbelievethereare, on the whole earthbesides, so many intensifiedbores as in these UnitedStates. No man can form anadequate idea of the real

meaningoftheword,withoutcominghere.”

“I don’t buy expensive suits.Theyjustlookcheaponme.”

“Idon't look to jumpover7-footbars:Ilookaroundfor1-footbarsthatIcanstepover.”

“I just think that - when acountry needs more incomeandwedo,we'reonly takingin15percentofGDP,Imean,

that - that - when a countryneeds more income, theyshouldget it from thepeoplethathaveit.“

“I never attempt to makemoneyonthestockmarket.Ibuy on the assumption thatthey could close the marketthenextdayandnotreopenitforfiveyears.”

“I think the most importantfactor in getting out of the

recession actually is just theregenerative capacity of - ofAmericancapitalism.”

“If a business does well, thestockeventuallyfollows.”

“If anything, taxes for thelower and middle class andmaybeeventheuppermiddleclassshouldevenprobablybecut further. But I think thatpeople at the high end -peoplelikemyself-shouldbe

paying a lot more in taxes.We have it better thanwe'veeverhadit.”

“If past history was all therewas to the game, the richestpeoplewouldbelibrarians.”

“In the 20th century, theUnited States endured twoworld wars and othertraumatic and expensivemilitary conflicts; theDepression; a dozen or so

recessions and financialpanics; oil shocks; a fluepidemic;and theresignationof a disgraced president.Yetthe Dow rose from 66 to11,497.”

“It takes 20 years to build areputationandfiveminutestoruin it. If you think aboutthat, you'll do thingsdifferently.”

“It's better to hang out with

people better than you. Pickout associates whosebehaviourisbetterthanyoursand you'll drift in thatdirection.”

“It's far better to buy awonderful company at a fairpricethanafaircompanyatawonderfulprice.”

“It'sneverpaidtobetagainstAmerica. We come throughthings, but it’s not always a

smoothride.”

“Let blockheads read whatblockheadswrote.”

“Look at market fluctuationsas your friend rather thanyourenemy;profitfromfollyratherthanparticipateinit.”

“Of the billionaires I haveknown,moneyjustbringsoutthe basic traits in them. Ifthey were jerks before they

had money, they are simplyjerkswithabilliondollars.”

“Only buy something thatyou'd be perfectly happy tohold if themarket shutdownfor10years.”

“Onlywhenthetidegoesoutdo you discover who's beenswimmingnaked.”

“Ourfavouriteholdingperiodisforever.”

“Priceiswhatyoupay.Valueiswhatyouget.”

“Risk comes from notknowing what you're doing.RiskisapartofGod'sgame,alikeformenandnations.”

“Rule No.1: Never losemoney. Rule No.2: NeverforgetruleNo.1.”

“The first rule is not to lose.The second rule is not to

forgetthefirstrule.”

“Should you find yourself ina chronically leaking boat,energy devoted to changingvessels is likely to be moreproductive than energydevotedtopatchingleaks.”

“Thebusinessschoolsrewarddifficult complex behaviourmore than simple behaviour,butsimplebehaviour ismoreeffective.”

“The investor of today doesnot profit from yesterday'sgrowth.”

“Theonlytimetobuytheseisonadaywithno"y"init.”

“There's class warfare, allright, but it's my class, therich class, that'smakingwar,andwe'rewinning.”

“The 400 of us pay a lowerpart of our income in taxes

than our receptionists do, orour cleaning ladies, for thatmatter. If you're in theluckiest 1 per cent ofhumanity, you owe it to therest of humanity to thinkabouttheother99percent.”

“I'vegot a lotof letters fromvariouspromoters around thecountry saying, you know,joinmyfundandwe'lldoitinthe fund. But if you look at

the cost of doing it andeverything,it'sgoingtoworkoutfineforthefundmanagerandhow itworksout for theinvestor is a different thing.Youknow,WallStreet has awayofcreatingproducts thatwork out better for it than itdoesfortheinvestor.”

“There aren't lots of bigcompaniesthatyoucanmakeadealonandtherearelotsof

big companies that I don'tunderstand.Sothey'reoutsidemycircleofcompetence.Andthenthereareothersthathaveno intention of selling, andthenthereareothers thatare,that were, they may havesome intention, but you can'tcome together with them onprice. So big deals are notgoing to happen very often,butoccasionallytheywill.”

Don'ttrytogetintouchwithmebycellphoneCould a lost voicemail havechanged the course offinancial history? It'sconceivable, in the case ofLehmanBrothersandWarrenBuffett. He has revealed thaton theweekend of Lehman'sspectacular collapse in 2008,Barclays' president, Bob

Diamond, rang him to ask ifhe'dbewillingtohelpwitharescue of Lehman. WhenBuffett took the call he washurrying out to anengagement in Edmonton,Alberta. So he askedDiamond to get back to himwith details later. Diamonddid call back and left amessage on the voicemail onBuffet's cellphone. But thenotoriously tech-unsavvy

Buffett was unfamiliar withthe workings of his handsetand didn't notice that therewasamessageonit.Withnooffer forthcoming, Lehmanproceeded to declare itbankrupt. And we all knowthe consequences to thatfiasco. Full 10-months laterBuffett asked his daughter,Susie, about a funny littlesymbol on the screen of hisphone. It turned out to be

Diamond with the lowdownonLehman.There's a simplelesson to the story, Buffetttold a conference: "Don't tryto get in touch with me bycellphone."

6.THEINVESTMENTPROCESSYou couldn’t advancein a finance

department in thiscountry unless youthought that theworldwas flat. Why notinvest your assets inthe companies youreally like? As MaeWest said, “Toomuchofagoodthingcanbewonderful”.

WarrenBuffett

TheShareMarketThemarket,whichismadeupofhundredsofthousandsof“independentexperts”isconstantlyplacingavalueoneverycompany.Whilethemarketiscertainlynotalwayscorrect,itservesasausefulandindependentproxyastothevalueofacompany.Itisclearherethatthemarketandtheindependentexpertare

notofonemind.

SomeGeneralRulesforSuccessfulShareTradingThe first andmost importantthing a tradermust have is atradingplan.Thisisawrittenplan, which you can refer tofromtimetotime.Thereasonforthisisthatitwillkeepyouontrackandontherightpathto becoming a successfulshare trader. It should

comprise of several stepswhichwillbecomeaconstantguide to each trade that youmake.

1.Objective.Themainideaisto make a Profit. This isregardlessofwhetheryouarea long-term or short-termtrader. Surprisingly enoughquite a few traders do notmakeaprofit.Thisusuallyisbrought about by not

planning in the first instance.They are actually tradingblindfolded. Not a verydesirable state to be in. Butfunny enough Traders aredoingitallthetime.

2. Risk. There are severaltypes of risks to be alert for.Firstlythereisoverallmarketrisk. What is the currentmood of the market rightnow? Is it a bear or bull

market? Depending on whattype of market it is, thisshould/could influence youonwhetherornottoenterthemarket now or later. Ifeverything is headingdownwards, a little delaymight mean that youpurchased that stock a littlecheaper.Abitofadvicehere,never try to pick the verybottomor thevery topof themarket.Ifyouhappentoit is

luck and nothing else. Eventhe so-called experts cannotpredict the toporbottom.Asmuch as theywould have usbelievetheycan.Anotherriskisspeculativerisk;thiscanbefound particularly in theminingoroilsector.Surethestock price can go skywards,but it can go the other wayjust as quick if not quicker.Only put a small proportionof your capital in this area.

Unless of course you arewilling to accept the riskinvolved. Only you candecidewhat levelof riskyouarecomfortablewith.

3.Entry.Thiswhereyouhavedecided what price you aregoing to pay for your share.Whatever you do, do notleave an order in overnight,particularly if the stock isvolatile that is tosay that the

stock is going up and downlike a yo-yo. You could paymore thanyoubargained for.Ifyoumustleaveinovernightput a limit towhat price youwanttopay.Nota‘atmarketorder.’Atleastyouwon’tgetanynastysurprisesthatway.

4. Timing. A very importantpart of your trading successwill be your timing. If themarketisgoingdownwardsa

little patience could mean abetter entryprice,whichwillreflect onyour profits.Don’ttry to pick the exact bottomor the top. Waiting to longmight mean the differencebetween a small profit and alarger more desirable one.The best advice is to get thebestpricepossibleatthetimeyoudecidetotrade.

5.Exit.Not enough attention

ispaidtothisarea.Timingisimportant, but a good tip is“have a pre-set exit figurealreadyprepared.Thishastheadvantage of you knowingalreadyhowmuchprofityouare going to make. Don’t begreedy. This is a trap thatmany traders fall into veryregularly.MorethanIcaretomention, small profits takenon a regular basis build veryquickly into quite large

amounts.

6. Stop/loss. This can meanthe difference betweensuccess and failure. A stoplossisapricethatisseteitherabove or below your shareprice. This has the effect ofstopping a substantial loss orabigone.Agoodguideistohave nomore than 2 percentofyourtotalportfolioatrisk.You can decide what

percentage you arecomfortable with. A trailingstop/loss is what you placejust behind your rising shareprice;thiseffectivelylocksinthoseprofitssonearanddeartoyouandme.

7. Paper trading. This is awonderful idea to practice,learn and fine-tune yourtrading skills withoutendangeringyourhardearned

cash; plus it is free which isanother advantage. There arewebsites where you can tryfor yourself and you mightpickupaprize,dependingonyourtradingskill.

ValueInvestingWarren Buffett has madehimselfintooneoftherichestmen in the world, with avalue investing philosophythat millions of investorsfollow. Let’s have a look atthe theory of value investingas well as the theory behindsome other forms ofinvesting. Many differenttypes of stock trading exist

including day trading, swingtrading, market making,scalping, charting,momentum trading, tradingthe news, arbitrage, technicaland fundamental analysis,Dow Theory, Elliott WaveTheory, Mark Twain effect,January effect, efficientmarket hypothesis, arbitragepricing theory and manyothers, some of which areoutlinedinthischapter.Value

investing is an investmentparadigm that derives fromthe ideas on investment andspeculation set out by BenGraham(regardedbymanytobe the father of valueinvesting)andDavidDoddintheir 1934 text SecurityAnalysis. Although valueinvesting has taken manyforms since its inception, itgenerally involves buyingsecurities whose shares

appear under-priced by someform(s) of fundamentalanalysis. For example, suchsecurities may be shares inpubliccompaniesthattradeatdiscounts to book value ortangible book value, havehigh dividend yields, havelow price-to-earningmultiples or have low price-to-book ratios. Notableproponents of valueinvesting, including Buffett,

have argued that the essenceof value investing is buyingstocks at less than theirintrinsic value. The discountof the market price to theintrinsic value is whatBenjamin Graham called the"margin of safety". Theintrinsic value is thediscountedvalueofallfuturedistributions. However, thefuture distributions and theappropriate discount rate can

only be assumptions. Buffetthas taken the value investingconcept even further as histhinking has evolved to apoint, where over last 30yearsorsohisfocushasbeenon "finding an outstandingcompany at a sensible price"ratherthangenericcompaniesat a bargain price. Thisconcept is important whenyouareactuallybuyingintoabusiness.

The people who establishedvalue investing, BenjaminGraham and David Dodd,were both professors atColumbia University andteachers of many famousinvestors. In Graham's bookThe Intelligent Investor; headvocated the importantconcept of margin of safety,first introduced in SecurityAnalysis, the 1934 book heco-authored with David

Dodd, which calls for acautious approach toinvesting.Intermsofpickingstocks, he recommendeddefensive investment instocks trading below theirtangible book value as asafeguard to adverse futuredevelopments oftenencountered in the stockmarket.However,theconceptof value (as well as "bookvalue") has evolved

significantly since the 1970s.Bookvalue ismost useful inindustries where most assetsaretangible.Intangibleassetssuch as patents, software,brands, or goodwill aredifficult toquantify,andmaynot survive thebreak-upofacompany. When an industryis going through fasttechnological advancements,the value of its assets is noteasily estimated. Sometimes,

the production power of anasset can be significantlyreduced due to competitivedisruptive innovation andtherefore its value can sufferpermanent impairment. Onegood example of decreasingasset value is a personalcomputer. An example ofwhere book value does notmeanmuchistheserviceandretail sectors. One modernmodel of calculating value is

the discounted cash flowmodel (DCF). The value ofan asset is the sum of itsfuture cash flows,discountedback to the present.Valueinvesting has proven to be asuccessful investmentstrategy. There are severalways to evaluate its success.One way is to examine theperformance of simple valuestrategies,suchasbuyinglowPEratiostocks, lowprice-to-

cash-flowratiostocks,orlowprice-to-book ratio stocks.Numerous academics havepublished studiesinvestigating the effects ofbuying value stocks. Thesestudies have consistentlyfound that value stocksoutperformgrowthstocksandthe market as a whole.Another way to examine theperformance of valueinvesting strategies is to

examine the investingperformance of well-knownvalue investors. Simplyexaminingtheperformanceofthe best known-valueinvestors would not beinstructive, because investorsdo not become well knownunless they are successful.This introduces a selectionbias. A better way toinvestigate the performanceof agroupofvalue investors

wassuggestedbyBuffett,inaspeechinMay1984thatwaspublished as TheSuperinvestors of Graham-and-Doddsville.In thisspeech,Buffett examined theperformance of thoseinvestors who worked atGraham-NewmanCorporation and were thusmost influencedbyBenjaminGraham. Buffett's conclusionis identical to that of the

academic research on simplevalue investing strategies -value investing is, onaverage, successful in thelong run. During a 25-yearperiod (1965-90), publishedresearch and articles inleading journals of the valueilk were few. The mostlasting contribution ofSecurity Analysis, firstpublishedin1934byGrahamand Dodd to the field of

security analysis was toemphasize the quantifiableaspects of security analysis(such as the evaluations ofearnings and book value)while minimizing theimportance of morequalitativefactorssuchasthequality of a company'smanagement. Graham's mostfamous student was WarrenBuffett, who ran successfulinvesting partnerships before

closingthemin1969tofocuson running BerkshireHathaway. Charlie Mungerjoined Buffett at BerkshireHathaway in the 1970s andhassinceworkedas theViceChairman of the company.Buffett has credited Mungerforencouraginghim to focuson long-term sustainablegrowth rather thanon simplythe valuation of current cashflows or assets. Another

famousvalueinvestorisJohnTempleton, who firstachievedinvestingsuccessbybuyingsharesofanumberofcompaniesintheaftermathofthe stock market crash of1929. Martin J. Whitman isanother well-regarded valueinvestor. His approach iscalled safe-and-cheap, whichwas hitherto referred to asfinancial-integrity approach.Whitman focuses on

acquiring common shares ofcompanieswithanextremelystrong financial position at aprice reflecting meaningfuldiscount to the estimatedNAV of the companyconcerned.Whitmanbelievesit is ill-advised for investorsto pay much attention to thetrend of macro-factors (likeemployment, movement ofinterest rate, GDP, etc.) notbecause they are not

important but becauseattempts to predict theirmovement are almost alwaysfutile. Joel Greenblattachievedannualreturnsatthehedge fund Gotham Capitalof over 50 percent per yearfor 10 years from 1985 to1995 before closing the fundand returning his investors'money. He is known forinvesting inspecialsituationssuch as spin-offs, mergers,

and divestitures. EdwardLampert, the chief of ESLInvestments, is best knownfor buying large stakes inSears and Kmart and thenmergingthetwocompanies.

MarkettrendsIn investing, financialmarkets are commonlybelieved to have markettrends that can be classifiedas primary trends, secondarytrends (short-term), andsecular trends (long-term).This belief is generallyconsistentwiththepracticeoftechnicalanalysisandbroadlyinconsistentwiththestandard

academic view of financialmarkets, the efficient markethypothesis. That marketprices move in trends is oneof the major assumptions oftechnical analysis, and thedescription of market trendsis common to share traders.Market trends are describedas periods when bulls(buyers) consistentlyoutnumber bears (sellers), orvice versa. A bull or bear

market describes the trendand sentiment driving it, butcan also refer to specificsecurities and sectors("bullish on BHP Billiton","bullish on technologystocks,"or"bearishongold",etc.).

BullMarketsBull Markets are a financialmarket of a certain group ofsecurities inwhichpricesarerisingorareexpectedtorise.The term "bull market" ismostoftenused in respect tothe stock market, but reallycan be applied to anythingthat is traded, suchasbonds,currencies,commodities,etc.

Bull markets are

characterized by optimism,investor confidence andexpectations that strongresultswill continue.Nobullmarket can last forever ofcourse, and sooner or later abearmarket (in which pricesfall)will come. It is tough ifnot impossible to predictconsistently when the trendsin the market will change.Part of the difficulty is thatpsychological effects and

speculation can sometimesplayalarge(ifnotdominant)role in the markets. Theextreme on the high end is astock-market bubble, and onthe low end- acrash.The useof "bull" and "bear" todescribemarkets comes fromthewayinwhicheachanimalattacksitsopponents.Thatis,abullthrustsitshornsupintothe air, and a bear swipes itspawsdown.Theseactionsare

metaphors for the movementofamarket:ifthetrendisup,itisconsideredabullmarket.Andifthetrendisdown,itisconsidered a bear market. Abull market tends to beassociated with increasinginvestor confidence,motivatinginvestorstobuyinanticipation of further capitalgains. The longest and mostfamousbullmarketwasinthe1990s when the U.S. and

many other global financialmarkets grew at their fastestpace ever. In describingfinancial market behaviour,the largest group of marketparticipants is often referredto,metaphorically, as a herd.This is especially relevant toparticipants in bull marketssince bulls are herdinganimals.Abullmarketisalsodescribed as a bull run.DowTheory attempts to describe

the character of thesemarketmovements.

BearMarketsAbearmarketisdescribedasbeing accompanied bywidespread pessimism.Investors anticipating furtherlosses are motivated to sell,with negative sentimentsfeeding on itself in a viciouscircle.Themost famousbearmarketinhistorywas1930to1932,markingthestartoftheGreat Depression. A milder,

low-level long-term bearmarket occurred from about1967 to 1983, encompassingthe stagflation economy,energy crises in the 1970s,and high unemployment inthe early 1980s. Pricesfluctuate constantly in theopen market. A bear marketisnota simpledecline,butasubstantial drop in the pricesof a range of issues over adefined period of time. By

one common definition, abear market is marked by apricedeclineof20percentormore in a key stock marketindexfromarecentpeakovera12-monthperiod.However,no consensual definition of abear market exists to clearlydifferentiateaprimarymarkettrend from a secondarymarket trend. Investorsfrequently confuse bearmarkets with corrections.

Corrections aremuch shorterlived, whereas bear marketsoccur over a longer periodwith typically a greatermagnitudeoflossfromtoptobottom.

BearmarkethistoricexamplesThe Crash of 1929 was anend to the bull market thatexistedthroughoutthe1920's.The Black Monday crash of1987didnotpushthemarketsinto a bear market. It was asharp, dramatic correctionwithin an upward trend. TheOctober 27, 1997 mini-crashis considered a somewhat

more minor stock marketcorrectionwhen compared toBlack Monday, but, like the1987 crash, it was acorrection during an upwardtrend. The stock marketdownturnof2002sawasharpdrop in stock prices in stockexchanges across the UnitedStates, Canada, Asia, andEurope. After recoveringfrom lows reached followingthe September 11 attacks,

indices slid steadily startinginMarch2002,withdramaticdeclines in July andSeptember leading to lowslast reached in 1997 and1998.TheUSdollardeclinedsteadily against the euro,reaching a 1-to-1 valuationnot seen since the euro'sintroduction. In May 2006,emerging markets includingIndia witnessed a correction.Indices fell as much as 20

percent before resuming thesecularBullRun.

StockTraderversusStockInvestorA stock trader or a stockinvestor is an individual orfirm who buys and sellsstocksorbonds(andpossiblyother financial assets) in thefinancialmarkets.Individualsorfirmstradingequity(stock)markets as their principalcapacity are called stocktraders. Stock traders usually

try to profit from short-termprice volatility with tradeslastinganywherefromseveralsecondstoseveralweeks.Thestock trader is usually aprofessional. A person cancallhimselfafullorpart-timestock trader/investor whilemaintaining otherprofessions. On the otherhand, stock investorspurchase stocks with theintention of holding for an

extended period of time,usually several months toyears.Theyrelyprimarilyonfundamentalanalysisfortheirinvestment decisions andfully recognize stock sharesas part-ownership in thecompany. Many investorsbelieve in the buy and holdstrategy, which as the namesuggests, implies thatinvestorswillhold stocks fora very long term, generally

measured in years. Thisstrategywasmadepopularinthe equity bullmarket of the1980s and 90s where buy-and-hold investors rode outshort-term market declinesand continued to hold as themarket returned to itsprevious highs and beyond.However, during the 2001-2003 equity bearmarket, thebuy-andhold strategy lostsome followers as broader

market indexes like theNASDAQ saw their valuesdecline by over 60%.Tradingactivitiesarenotfree.They have a considerablyhighlevelofrisk,uncertaintyand complexity, especiallyforunwiseand inexperiencedstock traders/investorsseeking for an easy way tomake money quickly. Inaddition, stocktraders/investors face several

costs such as commissions,taxes and fees to be paid forthe brokerage and otherservices, such as thebuying/selling orders placedat the stock exchange.Beyond these costs, theopportunity costs of moneyand time, currency risk,financialrisk,InternetServiceProvider, data and otherexpenses must be added.Although many companies

offercoursesinstockpicking,and numerous experts reportsuccess through TechnicalAnalysis and FundamentalAnalysis, many economistsand academics state thatbecause of Efficient MarketTheory it isunlikely thatanyamount of analysis can helpan investor make any gainsabovethestockmarketitself.In a normal distribution ofinvestors, many academics

believe that the richest aresimply outliers in such adistribution(i.e. inagameofchance, they have flippedheadstwentyyearsinarow).For this reason mostacademics and economistsrecommend that investorsinvestinfundsthatfollowanindexinthemarket,i.e.long-term and welldiversifiedinvestments.

IndexFundsAn index fund or indextracker is a collectiveinvestmentscheme(usuallyamutual fund) that aims toreplicatethemovementsofanindex of a specific financialmarket, or a set of rules ofownership that are heldconstant,regardlessofmarketconditions. Tracking can beachievedbytryingtoholdall

ofthesecuritiesintheindex,inthesameproportionsastheindex.Othermethodsincludestatistically sampling themarket and holding"representative" securities.Many index funds rely on acomputermodelwithlittleorno human input in thedecision as to whichsecuritiestopurchaseandaretherefore a form of passivemanagement. The lack of

active management (stockpicking and market timing)gives the advantage of lowerfees and lower taxes intaxable accounts. However,the fees will always reducethe return to the investorrelative to the index. Inaddition it is impossible topreciselymirror the index asthe models for sampling andmirroring, by their nature,cannotbe100%accurate.The

difference between the indexperformance and the fundperformance is known as the'tracking error' or informally'jitter'. Index funds areavailable from manyinvestment managers. Somecommon indices include theAllOrdinaries, theS&P500,the FTSE 100 and the FTSEAll-Share Index. In 1973,BurtonMalkiel published hisbookA RandomWalk Down

Wall Street, which presentedacademicfindingsfor the laypublic. Itwasbecomingwellknown in the lay financialpress thatmostmutual fundswere not beating the marketindices,towhichthestandardreply was made "of course,you can't buy an index."Malkiel said, "It's time thepublic can." The investmentobjectives of index funds areeasy to understand. Once an

investor knows the targetindexof an index fund,whatsecurities the index fundwillhold can be determineddirectly. Managing one'sindex fund holdings may beas easy as rebalancing everysix months or every year.Diversification refers to thenumberofdifferentsecuritiesin a fund.A fundwithmoresecurities is said to be betterdiversified than a fund with

smaller securities. Owningmany securities reducesvolatility by decreasing theimpact of large price swingsabove or below the averagereturn in a single security.Since some indices, such asthe All Ordinaries, the S&P500 and FTSE 100 aredominated by large companystocks, an index fund mayhaveahighpercentageofthefund concentrated in a few

large companies. Thisposition represents areductionofdiversityandcanlead to increased volatilityand investment risk for aninvestor who seeks adiversified fund. Assetallocation is the process ofdetermining the mix ofstocks, bonds and otherclassesofinvestableassetstomatch the investor's riskcapacity, which includes

attitude towards risk, netincome, net worth,knowledge about investingconcepts, and time horizon.Index funds capture assetclasses in a low cost and taxefficientmannerandareusedtodesignbalancedportfolios.

GrowthInvestingGrowthinvestingisastyleofinvestment strategy. Thosewho follow this style areknown as growth investors.Theyinvestincompaniesthatexhibit signs of above-average growth, even if thesharepriceappearsexpensivein terms of metrics such asprice-to-earning or price-to-book ratios. In typical usage,

the term "growth investing"contrasts with the strategyknown as value investing.Some notable investors suchasWarrenBuffetthavestatedthat there is no theoreticaldifference between theconceptsofvalueandgrowth("GrowthandValueInvestingare joined at the hip"), inconsideration of the conceptofanasset'sintrinsicvalue.Inaddition, when just investing

in one style of stocks,diversification can benegatively impacted. Afterthe busting of the dotcombubble,"growthatanyprice"has fallen from favour.Attaching a high price to asecurity in the hope of highgrowthmayberiskybecauseifthegrowthratefailstoliveup to expectations, the priceof the security can plummet.It is often more fashionable

now to seek out stocks withhigh growth rates that aretrading at reasonablevaluations. There are manyways to execute a growthinvestment strategy. Somegrowth investment vehiclesinclude: emerging markets,recovery shares, blue chips,Internet and technologystock,smallercompaniesandspecialsituations.

SociallyResponsibleInvestingSociallyresponsibleinvesting(SRI)describesaninvestmentstrategy which combines theintentions to maximize bothfinancial return and socialgood. In general, sociallyresponsible investors favourcorporatepracticeswhichareenvironmentally responsible,support workplace diversity,

and increase product safetyand quality. Some (not all)also avoid businessesinvolved in alcohol, tobacco,gambling,weaponsandothermilitary industries, and/orabortion. Modern SRImovement began during theVietnam War. Many peopleliving during the erarememberapicturefromJuneof 1972 of a naked nineyearold girl, Phan Thu Kim

Phúc, running towards aphotographer screaming, herback burning from thenapalm dropped on hervillage. That photographchannelled outrage againstDow Chemical, themanufacturer of napalm, andprompted protests across thecountry against DowChemical and othercompanies profiting from theVietnam War. In the late

1970s,SRIactivismturneditsattention to nuclear powerand automobile emissionscontrol.

Sociallyresponsibleinvesting(SRI)isaboomingmarketinboththeUSandEurope.Oneoutstanding endorsement of(SRI) policies is theNorwegian GovernmentPension Fund, which ismandated to avoid

"investmentswhichconstitutean unacceptable risk that theFund may contribute tounethical acts or omissions,such as violations offundamental humanitarianprinciples, serious violationsof human rights, grosscorruption or severeenvironmental damages."Social investors use fourbasic strategies to maximizefinancial return and attempt

to maximize social good.Screening excludes certainsecurities from investmentconsiderationbasedon socialand/orenvironmentalcriteria.For example, many sociallyresponsible investors screenout tobacco companyinvestments. This is anexampleofa social screenatwork.Divesting is the act ofremoving stocks from aportfolio based on mainly

ethical, non-financialobjections to certainbusinessactivities of a corporation.Shareholder activism effortsattempt to positivelyinfluence corporatebehaviour. These effortsinclude initiatingconversations with corporatemanagement on issues ofconcern, and submitting andvoting proxy resolutions.These activities are

undertaken with the beliefthatsocial investors,workingco-operatively, can steermanagementonacourse thatwill improve financialperformance over time andenhancethewellbeingofthestockholders, customers,employees, vendors, andcommunities. Positiveinvesting involves makinginvestments in activities andcompaniesbelievedtohavea

high and positive socialimpact. Positive investingactivities tend to targetunderserved communities. Theseeffortsmay support activitiesdesignedtoprovidemortgageand small business credit tominority and low-incomecommunities. At least oneU.S. mutual fund, the ViceFund (VICEX), was createdspecifically to contrast withthe trend in socially

responsibleinvesting.VICEXspecializesininvestinginthedefence, alcohol, tobacco,and gambling industries, andhasgreatlyoutperformedboththe S&P 500 and mostsocially responsible mutualfunds.

MagicFormulaInvestingMagicFormulaInvestingisaterm that refers to aninvestmenttechniqueoutlinedby Joel Greenblatt. MagicFormula Investing is firmlyrooted in the principles ofvalue investing. For the layinvestor, it is claimed that itoffers market-beating returnswithout the complexity

associated with a discountedcashflowanalysis.Greenblattsuggests purchasing 30 goodcompanies:cheapstockswitha high earnings yield and ahigh return on capital. HetoutsthesuccessofhismagicformulainhisbookTheLittleBook that Beats the Market,citingthatitdoesinfactbeatthe market 96% of the time,and has averaged a 17-yearannual return of 30.8%. The

comparison index used for"the market" in Greenblatt'sresearchistheS&P500.TheFormula: Establish aminimum marketcapitalization(usuallygreaterthan$50million).

•Excludeutilityandfinancialstocks

•Excludeforeigncompanies

• Determine company's

earnings yield = EBIT /enterprisevalue.

•Determinecompany'sreturnoncapital=EBIT/(Netfixedassets+workingcapital)

• Rank all companies abovechosen market capitalizationbyhighestearningsyieldandhighest return on capital(rankedaspercentages).

• Invest in 20-30 highest

ranked companies,accumulating 2-3 positionsper month over a 12-monthperiod.

• Rebalance portfolio onceper year, selling losers onedaybeforetheyear-markandwinnersonedayaftertheyearmark.

•Continueoverlong-term(3-5year)period.

DartBoardMethodFinancial journals andnewspapers such as theWallStreet Journal have carriedarticles on stock picking inthe past. One famous articleinvolved a stock pickingcontest between a panel ofWall Street experts, thepublic and a dart board.Onememberwaselectedtothrowdarts at the Journal's stock

page in order to select aportfolio. At the end of theexperiment, the public andthe dart board both beat theboard ofWall Street experts.Was the dart board moresavvy?

Thedartboard'striumphoverWall Street experts can beattributed to chance (one canalso attribute the dart boardlosing to the experts as a

coincidenceaswell).

ArbitragePricingTheory(APT)Arbitrage pricing theory infinance,isageneraltheoryofassetpricingthathasbecomeinfluential in the pricing ofshares. APT holds that theexpectedreturnofafinancialasset can be modelled as alinear function of variousmacro-economic factors ortheoretical market indices,

where sensitivity to changesin each factor is representedby a factorspecific betacoefficient. The model-derived rate of return willthenbeusedtopricetheassetcorrectly - the asset priceshouldequaltheexpectedendof period price discounted atthe rate implied bymodel. Ifthe price diverges, arbitrageshouldbringitbackintoline.The theory was initiated by

economist Stephen Ross in1976. In economics andfinance, arbitrage is thepractice of taking advantageofapricedifferentialbetweentwo or more markets: acombination of matchingdeals is struck that capitalizeupontheimbalance,theprofitbeing the difference betweenthemarketprices.Whenusedby academics, an arbitrage isatransactionthat involvesno

negative cash flow at anyprobabilisticortemporalstateandapositivecashflowinatleast one state; in simpleterms- a risk-free profit. Aperson who engages inarbitrage is called anarbitrageur. The term ismainly applied to trading infinancialinstruments,suchasbonds, stocks, derivatives,commodities and currencies.If the market prices do not

allowforprofitablearbitrage,the prices are said toconstitute an arbitrageequilibrium or arbitrage-freemarket.Arbitrageequilibriumisapreconditionforageneraleconomic equilibrium. Theassumption that there is noarbitrage is used inquantitative finance tocalculateauniqueriskneutralprice for derivatives.Statistical arbitrage is an

imbalanceinexpectedvalues.A casino has a statisticalarbitrage in almost everygameofchancethatitoffers.Conditions for Arbitrage:Arbitrage is possible whenone of three conditions ismet:

Thesameassetdoesnottradeat the same price on allmarkets ("the law of oneprice").

Two assets with identicalcashflowsdonottradeatthesameprice.

An assetwith a known pricein the future does not todaytrade at its future pricediscounted at the risk-freeinterest rate (or, the assetdoesnothavenegligiblecostsof storage; as such, forexample, thisconditionholdsfor gain but not for

securities).

Arbitrage is not simply theactofbuyingaproductinonemarket and selling it inanother for a higher price atsome later time. Thetransactions must occursimultaneously to avoidexposure to market risk, orthe risk that prices maychangeononemarketbeforeboth transactions are

complete. In practical terms,thisisgenerallyonlypossiblewith securities and financialproductswhichcanbetradedelectronically.

In the simplest example, anygood sold in one marketshouldsellforthesamepricein another. Traders may, forexample,findthatthepriceofwheatis lowerinagriculturalregions than in cities thus

they purchase the good, andtransport it to another regiontosellatahigherprice.

Thistypeofpricearbitrageisthe most common, but thissimple example ignores thecost of transport, storage,risk,andotherfactors."True"arbitrage requires that therebe no market risk involved.Where securities are tradedon more than one exchange,

arbitrage occurs bysimultaneouslybuyinginoneandsellingontheother.

ScalpingScalping, when used inreference to trading insecurities, commodities andforeign exchange, may referto, a fraudulent form ofmarket manipulation, or, alegitimate method ofarbitrage of small price gapscreatedbythebid-askspread.Scalping in this sense is thepractice of purchasing a

security for one's ownaccount shortly beforerecommending that securityfor a long-term investmentand then immediately sellingthe security at a profit uponthe rise in the market pricefollowing therecommendation.

SwingTradingSwing trading sits in themiddle of the continuumbetween day trading andtrend following. Swingtradersholdaparticularstockforaperiodoftime,generallybetween a few days and twoor threeweeks, and trade thestockonthebasisofitsintra-week or intra-monthoscillations between

optimismandpessimism.Thefirst key to successful swingtrading is picking the rightstocks. The best candidatesare large-cap stocks that areamong the most activelytraded stocks on the majorexchanges,forexampleintheU.S., Intel, Microsoft, andCisco Systems. In activemarkets, these stocks willswing betweenbroadlydefined high and low

extremes, and the swingtrader will ride the wave inone direction for a couple ofdaysorweeks,onlytoswitchto the opposite side of thetradewhenthestockreversesdirection. It should be notedthat in either of the twomarket extremes, thebearmarket environment orbull market, swing tradingproves tobea ratherdifferentchallenge than in a market

that is between these twoextremes. In these extremes,even the most active stockswill not exhibit the sameupand-down oscillations thatthey would when indices arerelatively stable for a fewweeks or months. In a bearmarket or a bull market,momentum will generallycarrystocksforalongperiodoftimeinonedirectiononly,therebyensuringthatthebest

strategy will be to trade onthe basis of the longertermdirectionaltrend.

Theswingtrader,therefore,isbestpositionedwhenmarketsare going nowhere - whenindices rise for a couple ofdaysand thendecline for thenext fewdays,only to repeatthe same general patternagain andagain.Acoupleofmonths might pass with

major stocks and indicesroughly the same as theiroriginal levels, but the swingtrader has had manyopportunities to catch theshort terms movements upand down (sometimes withinachannel).

ContrarianInvestingInfinance,acontrarianisonewho attempts to profit byinvesting in a manner thatdiffers from the conventionalwisdom,when the consensusopinionappears tobewrong.A contrarian believes thatcertain crowd behaviouramong investors can lead toexploitable mispricing insecurities markets. For

example, widespreadpessimism about a stock candrive a price so low that itoverstates the company'srisks, and understates itsprospects for returning toprofitability. Identifying andpurchasing such distressedstocks,andselling themafterthe company recovers, canlead to above-average gains.Similarly, widespreadoptimism can result in

unjustifiably high valuationsthat will eventually lead todrops, when those highexpectations don't pan out.Avoiding investments inover-hyped investmentsreduces the risk of suchdrops. These generalprinciples can apply whetherthe investment in question isan individual stock, anindustry sector, or an entiremarket or asset class.

Contrarians are sometimesthought of as perma-bears -market participants who arepermanently biased to a bearmarket view. However, acontrarian does notnecessarily have a negativeview of the overall stockmarket, nor does he believethat it is always overvalued,or that the conventionalwisdom is always wrong.Rather, a contrarian seeks

opportunities to buy or sellspecificinvestmentswhenthemajority of investors appearto be doing the opposite, tothe point where thatinvestment becomesmispriced.Whilemore"buy"candidates are likely to beidentified during marketdeclines (and vice versa),these opportunities can occurduring periods when theoverall market is generally

risingorfalling.

DowTheoryDow Theory is a theory onstock price movements thatprovidesabasis for technicalanalysis. The theory wasderivedfrom255WallStreetJournal editorials written byCharles H. Dow (1851–1902),journalist,founderandfirst editorof theWallStreetJournal and co-founder ofDow Jones and Company.

Following Dow's death,William P. Hamilton, RobertRheaandE.GeorgeSchaeferorganized and collectivelyrepresented "Dow Theory,"based on Dow's editorials.However,Dowhimselfneverusedtheterm"DowTheory”.The six basic tenets of DowTheory as summarized byHamilton,Rhea,andSchaeferaredescribedbelow.

SixBasicTenetsofDowTheory

1.MarketsHaveThreeTrends.

Dowdefinedanuptrend(trend1)asatimewhensuccessiveralliesinasecuritypricecloseatlevelshigherthanthoseachievedinpreviousralliesandwhenlowsoccuratlevelshigherthanpreviouslows.

Downtrends(trend2)occurwhenmarketsmakelowerlowsandlowerhighs.ItisthisconceptofDowTheorythatprovidesthebasisoftechnicalanalysis'definitionofapricetrend.Dowdescribedwhathesawasarecurringthemeinthemarket:priceswouldmovesharplyinonedirection,recedebrieflyintheoppositedirection,andthencontinue

intheiroriginaldirection(trend3).

2.TrendsHaveThreePhases.

Dow Theory asserts thatmajor market trends arecomposedofthreephases:anaccumulation phase, a publicparticipation phase, and adistribution phase. Theaccumulationphase(phase1)is when investors "in the

know" are actively buying(selling) stock against thegeneralopinionofthemarket.During this phase, the stockprice does not change muchbecausetheseinvestorsareinthe minority absorbing(releasing) stock that themarket at large is supplying(demanding). Eventually, themarket catches on to theseastute investors and a rapidprice change occurs (phase

2). This is when trendfollowers and othertechnically oriented investorsparticipate. This phasecontinues until rampantspeculation occurs. At thispoint, the astute investorsbegin to distribute theirholdingstothemarket(phase3).

3.TheStockMarketDiscountsAllNews.

Stock prices quicklyincorporate new informationas soon as it becomesavailable. Once news isreleased, stock prices willchange to reflect this newinformation. On this point,DowTheoryagreeswithoneof the premises of theefficientmarkethypothesis.

4.StockMarketAveragesMustCon"rmEachOther

InDow's time, theUSwasagrowing industrial power.The US had populationcentres but factories werescattered throughout thecountry.Factorieshadtoshiptheirgoodstomarket,usuallyby rail. Dow's first stockaverages were an index ofindustrial (manufacturing)companies and railcompanies. To Dow, a bullmarket in industrials could

not occur unless the railwayaverage rallied as well(usually first). According tothis logic, if manufacturers'profits are rising, it followsthattheyareproducingmore.If they produce more, thentheyhavetoshipmoregoodsto consumers. Hence, if aninvestor is looking for signsofhealthinmanufacturers,heor she should look at theperformance of the

companies that ship theoutputtomarket,therailroads.The two averages should bemovinginthesamedirection.When the performances ofthe averages diverge, it is awarning thatchange is in theair. Both Barron's Magazineand the Wall Street Journalstill publish the dailyperformance of the DowJonesTransportationIndexinchart form. The index

contains major railroads,shipping companies, and airfreightcarriersintheUS.

5.TrendsAreCon"rmedByVolume

Dow believed that volumeconfirmedpricetrends.Whenprices move on low volume,therecouldbemanydifferentexplanations.Forexample,anoverlyaggressivesellercouldbe present. But when price

movements are accompaniedby high volume, Dowbelieved this represented the"true" market view. If manyparticipants are active in aparticular security, and theprice moves significantly inone direction, Dowmaintained that this was thedirectioninwhichthemarketanticipated continuedmovement. To him, it was asignal that a trend is

developing.

6.TrendsExistUntilDe"nitiveSignalsProveThatTheyHaveEnded

Dowbelievedthattrendsexisteddespite"marketnoise".Marketsmighttemporarilymoveinthedirectionoppositethetrend,buttheywillsoonresumethepriormove.Thetrendshouldbegiventhebenefitofthe

doubtduringthesereversals.Determiningwhetherareversalisthestartofanewtrendoratemporarymovementinthecurrenttrendisnoteasy.DowTheoristsoftendisagreeinthisdetermination.Technicalanalysistoolsattempttoclarifythisbuttheycanbeinterpreteddifferentlybydifferentinvestors.

ChartingA point and !gure chart isusedfor technicalanalysisofsecurities. Unlike most otherinvestment charts, point andfigurechartsdonotpresentalinear representation of time.Instead, they show trends inprice. The aim of point andfigurecharting is to filteroutthe "noise" (unimportantprice movement) and focus

on the main direction of theprice trend. Point and figurecharts are usually used forlonger-termpricemovements.However,theycanbeusedtoday trade by clearlyidentifying the key points ofsupplyanddemand.Theyareveryeffectiveatkeepingyouon the right side of themarket. Point and figurecharts can do a really goodjob tospotverygood trading

opportunities on a trade andtrendmarket.Pointandfigurecharts are close relatives tothree line break, renko andkagi charts all of which donot have a fixed timeframe.Thismakesyoutradeonlytheimportant moves of themarket. Minor moves arediscarded because of thelimited gain potential. Thereare two typical ways to plotpointandfigurecharts-using

closing prices, or withhigh/low prices. The mostcommonmethodnowadaysishigh/low prices of a specifictimeframe, normally dailyprices. Point and figurecharting is said to have hadits origins in the US duringthe early1900swith the firstbook appearing by deVilliersin 1933. The Point& FigureMethodofAnticipatingStockPriceMovementsshowedthat

this charting technique wasalready known by insidersand stock traders. Point andfigure charts where alreadythereinthetradingroomsforthe purpose to record dailytick movements of stockswhen Charles Dow wasbeginning to create hisfamousindex.

ElliottWavePrincipleTheElliottWavePrinciple isa form of technical analysisthat attempts to forecasttrends in the financialmarkets and other collectiveactivities. It is named afterRalph Nelson Elliott (1871–1948), an accountant whodeveloped the concept in the1930s: he proposed that

market prices unfold inspecific patterns, whichpractitionerstodaycallElliottwaves. Elliott argued thatbecause humans arethemselves rhythmical, theiractivities anddecisions couldbe predicted in rhythms, too.Critics argue the theory isunprovable and inconsistentwith the efficient markethypothesis. The waveprinciplepositsthatcollective

investor psychology (orcrowd psychology) movesfrom optimism to pessimismandbackagain.Theseswingscreate patterns, as evidencedin the price movements of amarket at every degree oftrend.Elliott'smodelsaysthatmarket prices alternatebetweenfivewavesandthreewavesatalldegreesoftrend,as the illustration shows. Asthese waves develop, the

largerpricepatternsunfoldinself-similarfractalgeometry.

SpeculationSpeculation, in the narrowsense of using it as financialspeculation, involves thebuying, holding, selling, andshort-sellingofstocks,bonds,commodities, currencies,collectibles, real estate,derivatives, or any valuablefinancial instrument to profitfrom fluctuations in its priceas opposed to buying it for

use or for income viamethodssuchasdividendsorinterest. Speculation oragiotage represents one offourmarket roles inWesternfinancial markets, distinctfromhedging, long-orshort-term investing, andarbitrage.Convention and especiallysatire sometimes portrayspeculators comically asspeculatinginporkbellies(inwhich a realmarket and real

speculators exist) and often"losingtheirshirts"ormakinga fortune on small marketchanges.Speculationexistsinmany suchcommodities,but,if measured by value, themost important markets dealin futurescontractsandotherderivatives involvingleverage that can transformasmall market movement intoa huge gain or loss. Mostnon-professional traders lose

money on speculation, whilethose who do make moneytendtobecomeprofessionals.Occasionally some dramaticeventwill occur, such as theeffortof theHuntbrothers tocornerthesilvermarketorthecurrency speculations ofGeorge Soros or thespeculative trading of NickLeeson, which caused thecollapseofBaringsBank.Bysome definitions, most long-

term investors, even thosewhobuyandholdfordecadesmay be classified asspeculators, excepting onlythe rare few who are notprimarily motivated byeventually selling at a goodprofit. Some dedicatedspeculators are distinguishedby shorter holding times, theuse of leverage, by beingwillingtotakeshortpositionsas well as long positions (in

marketswhere thedistinctioncan be reasonably made). Adegree of speculation existsin a wide range of financialdecisions, from the purchaseofahousetoabetonahorse;this is what modern marketeconomists call "ubiquitousspeculation.

" In Security Analysis,Benjamin Graham gave adefinition of speculation in

relation to investment: "Aninvestment operation is onewhich, upon thoroughanalysis, promises safety ofprincipal and a satisfactoryreturn. Operations notmeeting these requirementsarespeculative."

MarkTwainEffectIn some U.S. stock markets,theMarkTwain effect is thephenomenon of stock returnsin October being lower thanin other months. The namecomes from the followingquotation attributed to MarkTwain: "October.This is oneof the peculiarly dangerousmonthstospeculateinstocks.The others are July, January,

September,April,November,May, March, June,December, August, andFebruary." It is interesting tonote both the 1929 and 1987stockmarketcrashesoccurredinOctober.

TheTrader'sWorstEnemy-aoneleggedchairThinkofa three leggedchairwithonelegrepresenting:

1. Emotional health (family,friends, spiritual needs andpersonalgoals),

2. Physical health (our diets,nutrition, exercise and

activities),

3.Financialhealth(investing,savings,businessdecisions).

If any one of these legs isbroken, you are going to fallflat on your butt, so try andtake the time to keep theweightspreadoutevenlyoverthemall,andkeepthemallingoodshape.Inthelongrun,itistheonlywayanyofuswillever reach a state of

"wellbeing" and "happiness"thus developing the state oftruewealthintelligence.

BuffettandShortSelling"You'll see way more stocksthat are dramaticallyovervalued than dramaticallyundervalued. It'scommonforpromoters tocauseastocktobecome valued at 5-10 timesitstruevalue,butraretofinda stock trading at 10-20%ofits true value. So you mightthinkshortsellingiseasy,but

it's not. Often stocks areovervaluedbecausethereisapromoteroracrookbehindit.Theycanoftenbootstrapintovalue by using the shares oftheir overvalued stock. Forexample,itit'sworth$10andistradingat$100,theymightbeabletobuildvalueto$50.Then,WallStreetsays,"Hey!Look at all that valuecreation!"and thegamegoeson. [As a short seller,] you

could run out of moneybefore the promoter runs outof ideas. "Everything we'veever thought about shortingworkedouteventually,butit'svery painful. It's a whole loteasier tomakemoneyon thelongside.Youcan'tmakebigmoney shorting because therisk of big lossesmeans youcan'tmakebigbets."

PersonalityandtheInvestmentProcessPersonalityisahugefactorintheinvestmentprocess.AttheAustralian InvestorsAssociation Conference onthe Gold Coast in 2012, thefounder of Relate EmpowerDeliver, David Chia, spokeon the subject. Give 10peopleexactlythesamedata,he said, and ask them what

they think and theywill giveyou10differentanswers.Thedata is the same but ourpersonalities conspire todivine 10 uniqueinterpretations. Personalitiesdictate investment success orfailure,notthedata.Thedatais not the determining factorof success or failure, "You"are. It is well understood inthe texts thathumans arenotgeared to the investment

process because they aregeared to emotion, likes,dislikes,eventheirtaxstatus,none of which have anybearing on where a shareprice is going to go next butall of which find their wayinto the investment process.For instance, if you findyourselfsaying"IhateXYZ"or "I like ABC" about aparticular stock, you have abias that is preventing a

clinical decision. Net effect,youshouldbeonthelookoutfor your own bias and forotherpeople'sbias.Themorebias, the less effective theiradvice. Having apredisposition to a particularstock is a dangerous failing.Having a predisposition tooptimisminamarketthathasgonedown9.6percentayearfor five years is a costlyemotional bias. Being

predisposed to pessimism isthesame.Prideisabias-thedesire not to bewrong - andthere are many ''experts''whose objectivity has beensacrificed to bias based ontheir earlier calls. Themoment they care aboutbeing right or wrong, theyhave lost value. When itcomes to investment, youneedtobecold,dispassionateandunaffected.Onthatbasis,

who do you trust more:yourself, a guru, or maths,scienceandacomputerchip?

Source: Marcus Padley,author of stock marketNewsletterMarcusToday

7.BUFFETTBETSBIGONHOUSINGWe simply attempt tobefearfulwhenothers

are greedy and to begreedy only whenothersarefearful.

WarrenBuffettWhat does Warren Buffettsee thatnooneelsedoes? InJune2012hemadeanoutsizebid on bankrupt mortgagelender ResCap loans-thelatest exampleofhisbet thatthehousingmarketrepresents

a great investmentopportunity.

Buffett'sBerkshireHathawayplaced bids on a bankruptmortgage lender that it maynot want, in what someinvestors and observers viewas an effort to make moremoneyonBerkshire'sstakeinthe company's bonds.Berkshire hasmade two bidsfor Residential Capital, the

bankrupt unit of AllyFinancial that makes loansand collects payments onthem.Both bidswere toppedby Nationstar MortgageHoldings, which also makesand services loans. Anauction for the unit was dueto start later in the year.ResCap's parent, AllyFinancial, was previouslyknown as General MotorsAcceptance Corp and was

once the auto lendingarmofwhat is now GeneralMotorsCo.

ResCap was a majorsubprime lender that becameanalbatrossforGMACwhenlosses ballooned during thefinancialcrisis.Allywantstoshed ResCap's mortgageliabilitiesas it seeks to repaygovernment bailouts. Manybelieve Buffett will buy

ResCap if he has to, butwould rather drive the pricehigherforNationstar.Foronething, Berkshire Hathawaylacks the licenses needed tomake mortgage loans. Foranother, Buffett often shiesawayfromacquiringfinancialcompanies outside of theinsurance business. ButBerkshire Hathaway hasmuch to gain from pushingNationstar to bid more.

Berkshire owned more than$900 million of ResCapjunior secured debt as ofJune, representing more than40 percent of the totaloutstanding for that class.Going into the bankruptcy,whenNationstarwas bidding$2.4 billion, media reportssuggestedthesecuredholderscould get 93 cents on thedollar. But the moreNationstar pays the more

money Berkshire Hathawaygets. In fact, with the higheroffer from Nationstar,secured bondholders wereexpected to be paid back infull, according to one personinvolved in the restructuring.Even unsecured creditorswere likely to make somerecovery. To outsiders,Buffett's strategy makesperfectsense.

"The worst-case scenario isheowns itandhe'll justholdonto it," according to oneassetmanagerwho hasmorethan$12millioninBerkshireHathawaystock.

"Thebest-case scenario is heextractsahigherbidand thathelps him on the debt side,"hesaid."Ithinkit'soneofhisbrightermoves."

DidyouknowtheU.S.housingmarkethassuffereditsbiggestcrashever,causingamajorfallindemandandprices?More than 7 million homeshave been foreclosed -equivalent to the combined

Sydney and Melbournemetropolitan areas. The U.S.economyandhousingmarketare at their absolute lowestpoint in 30 years. Someproperties have plummetedfrom $300,000 to just$40,000. In many instancesAmericans are literallywalking away from theirmortgages. American banksare now extremely cautiousabout lending money for

houses, while internationalbuyers are snapping upincredible bargains. Butsurprisingly therental returnsonthesepropertieshasstayedthe same. This presents aunique, possibly once in alifetime opportunity forinvestors-anopportunitythathasn’t been seen since thegreatdepressionofthe1930’saccording to somecommentators. This has

brought on a dramatic swingtowards rentals and, inmanycases, increased rentalreturns. The Aussie dollar isat an all time high - at thetimeofwritingitisalmostatpar with the U.S. dollar.Many readers will painfullyrecall overseas trips in yearsgone by when the Aussiedollar was worth around 50cents!

Recent research shows thatU.S. property prices haverisen for the third monthrunning!

Where else can you investapproximately $50,000 andimmediately star collectingpositivecashflowof15-20%netreturns?

Duetothepotentialofcapitalgrowth, low entry point andhigh rental returns we have

established that there is alarge demand for UnitedStates property amongstAustralian and New ZealandInvestorsyettherearelimitedservices and resources thatcanassistyouinthisgoal.

For the price the Channel 9show, ‘The Block’, paid forjust oneMelbourne property,you could buy almost fiftycash flow positive properties

in the U.S. with only 5%deposit!

AsaconsequenceoftheU.S.credit crisis combined withthese conditions internationalinvestors are swooping innow before the U.S. marketbouncesbackup.

Like Warren Buffet, I ambullishabouttheUSHousingmarket and I have been anactivebuyerinthemarketfor

several years now. No onehas a crystal ball when itcomes to investing but onesavvy investor, Americanhedge fund manager JohnPaulson,was prepared to beton the U.S. property marketcrashing and as aconsequencehemadebillionsof dollars. Paulson became abillionaire by short-sellingsub-primemortgagesin2007,and made $3.5 billion that

year. In 2010, he beat ahedge-fundrecordbymakingnearly $5 billion. He wasranked39onthe2011Forbeslist of the world's wealthiestpeople with a net worth ofalmost $16 billion. At thetime of writing WarrenBuffet, arguably the mostfamous and respectedinvestor of all time wastaking a contrarian investorstance by investing in U.S.

housing.Australians arewellknownandrespectedfortheirloveofowningand investingin real estate and manypeople have done very wellfrom real estate in the lasttwentytothirtyyears,thoughatthetimeofwriting,growthprospects have slowed downalittlebutshouldstillprovidestablegrowth.Oneofthekeypoints I like to constantlyremind people attending my

seminars is that the lessfinancialeducationyouhave,the more money you willneedinordertoretire.Peoplewithafinancialeducationareoften able to do dealswith aminimumdeposit.Becauseofthe slow down in Australianreal estate, as an investor Istarted looking at other areasofpotentialgrowththatmightprovide a higher return thanAustralian real estate. As a

fan of Buffett’s investmentstrategywhenIheardhewasbullish on the U.S. housingmarket recovery I researchedthe market extensivelyincluding exploring manystreets and suburbs of U.S.cities todiscoverhowtobestprofit fromU.S. housing andestablished an entire team toacquiremeU.S.propertiesonmass.

8.FINALWORDSFROMTHESAGEOFOMAHA

In the business world,therear-viewmirror isalwaysclearerthanthewindshield.

WarrenBuffettPersonally, I am nowcomfortable and happy to beinvesting in the U.S. realestatemarket.IhavetravelledtotheU.S.anumberoftimes

to study and educate myselfand carry out due diligenceon potential opportunities inthe real estate market there.As a result, my initial fears,scepticism andmisconceptions areovercome. Personally I amnowexcitedanddrivenbytheopportunities I found there,and have purchased moreU.S. property. Despite itsoundinglikeatiredcliché,I

firmly believe the U.S. realestate market currentlypresents a once in a lifetimeopportunity for investors.One of the reasons I amexcited about theseopportunities isbecausewhatwouldtakemillionsofdollarsin Australian real estate toachieve a comfortableretirement position, can beachieved in the U.S. for afractionofthatamount.Asan

example of the currentopportunitiesatthetopendofthe U.S. property market,former politician Sarah Palinrecently purchased a largehouse in Phoenix for $1.7million. Just a few monthsback an investor hadpurchased it for $800,000. Ipersonally inspected a hugemansion being offered for$960,000 that would sell forat least $5 million in

Australia.

Warren Buffett, the ‘Sage ofOmaha', is generallyconsidered to be the world’smost successful investor andhas inspired countlesscopycats and hangerson. Hisinvestmentvehicle,BerkshireHathaway, is legendary.Investorswouldlovetoknowthe secret of his success - toknow how he became

America’s second or thirdrichest man, and a livinglegend. For mostshareholders, Buffet can dono wrong. And the evidenceisintheshareprice.Recentlyeach Class A share inBerkshire Hathaway wasworthalmostUS$130,000.Inthe last 40 years,Buffett hasincreased the book value ofthe company by around300,000 percent. Buffett has

madesomebrilliantmovesinhis career, such as turning a$1 billion investment inWells Fargo into $4 billion;making 500% profits on amassive investment in Geicoand inoneofhisbestknownandmost talked about plays-turning $1 billion into $8billion with Coca-Cola.Buffett is famous for drollquotessuchas

• “I got interested (inbusiness) when I was sevenor thereabouts. I wasted mytimebeforethat.”

• “Buy businesses that anidiot could run, because onedayonewill.”

• “We really want to buyfrom someone who doesn'twanttosell.”

AsBuffett’s assistantCharlie

Munger tells it, Berkshire istotally out of step withmodern corporate practice. Itbuys firms whosemanagement it admires,keeps that management andleavesthecompaniesalone.Itis worth more than US$100billionandhasonly16peoplein its head office. "Theinteresting thing is how wellit has worked for a greatmany decades, and how few

peoplecopyit,"Mungersays.BuffettsaysBerkshirehasnoincentives to meet profittargets, believing it mightencourage people to dosomething they wouldn'totherwise do to meet thosetargets. "Businesses don'tneed quarterly expectations,quarterafterquarter,"hesays.Berkshiredoesnotbelieve inasset allocation, a basic tenetof most investment

companies, whereinvestments are dividedbetween different classes. Itjustlooksforgoodcompaniesat lowprices.Berkshire doesnot believe in "gin rummy"management either, whereonecompanyisdiscardedandanotherbought.Itdoesn'tsellcompanies just because theyarelosingmoney.

Buffett remarks that there is

no exit from a financialmeltdown. "Think about aburningtheatre.Theonlywayto leave your seat in aburningfinancialmarketistofind someone to take yourseat, which isn't easy."Buffett does not give stocktips, andwhy should he?Hedoes however, from time totime, sound out investmentprinciplesinhisannuallettersto Berkshire Hathaway

stockholders, in reports toannual meetings and, fromtime to time, in the media.Hisinvestmentsecretscanbegleanedfromthesecommentsand I have researched someof them for this book. Notsurprisingly, they invariablyseem to spell out good,common sense, investmentprinciples.

1. The company should be

soundly managed. Tests ofgood management include:share buybacks, good use ofretained earnings, sticking towhatyouknow.

2. The company hasdemonstrated earningcapacity with a likelihood ofcontinuation.Testsofearningcapacity include: companygrowth, dealing withinflation, capital expenditure,

look through earnings, brandnames.

3. The company should haveconsistently high returns.WarrenBuffettwouldlookatboth: Returns on equity andReturnsoncapital.

4. The company should haveaprudentapproachtodebt.

5. The businesses of thecompany should be simple

and the investor should havean understanding of thecompany.

6. Assuming that all thesethresholds are satisfied, theinvestment should only bemade at a reasonable price,withamarginof safety.Thisis always a matter ofindependentjudgementbytheinvestor but it is relevant toconsider: price/earnings

ratios, earnings and dividendyields, book value,comparativeratesofreturn

7. Investors need to take along term approach. Buffettbelieves, as did BenjaminGraham,thatinvestorsshouldlook upon share investmentasbuyingapartofabusiness.Investors should take thesame approach to buyingshares as they would if they

were buying a business. Theonlydifferenceisthatinsteadofbuying thewholebusinessor a partnership in thebusiness, they are onlybuyingatinyshare.

A prudent investor neverbuys a business that they donot understand. Similarly, aprudentshare investorshouldnever buy shares in acompany, whose business

theydonotunderstand.

In 1977, Buffett toldshareholders in BerkshireHathaway that theircompanywould only invest in abusiness that the directorscould understand. He hasrepeated this message manytimes since and expanded onthis theme: ‘We try to stickwith businesses we believewe understand. That means

theymustberelativelysimpleand stable in character. If abusiness is complex orsubject to constant changewe’re not smart enough topredict future cash flows.Incidentally that shortcomingdoesn’tbotherus.’

SuccessionPlansInMay2010,Buffett,monthsaway fromhis 80thbirthday,saidhewouldbesucceededatBerkshire Hathaway by ateamconsistingofaCEOandthree or four investmentmanagers; each of the latterwould be responsible for a"significant portion ofBerkshire's investmentportfolio."

Five months later, Berkshireannounced thatToddCombs,manager of the Castle PointCapital hedge fund, wouldjoin them as an investmentmanager. InSeptember2011,Berkshire Hathawayannounced that 50-year-oldTed Weschler, founder ofPeninsula Capital Advisors,will join Berkshire in early2012 as a second investmentmanager. In Berkshire

Hathaway's annual February2012 shareholder letter,Buffettsaidthathissuccessoras CEO had been choseninternally but not namedpublicly. While the intent ofthis message was to bolsterconfidence in the leadershipof a "Buffett-less Berkshire",critics have noted that thisstrategy of choosing asuccessor without a concreteexit strategy for the sitting

CEO often leaves anorganizationwithfewerlong-term options, while doinglittletocalmshareholderfearin reaction to theannouncement. Oneleadership consultant whospecializes in CEOsuccession, noted, "You seethis more often withsuccessful founder CEOs.Becausethey’resogood,theywant to take the lead in

choosing their replacement,[but]mostboardstrytoavoidwhatBuffettdid."“Thesafestthing, well, greatest asset toown is your own abilities. Imean, no matter whathappens in the economy orwithcurrency,ifyoudevelopyour own talents, I tell thecollege students that the bestthing to have is your chanceto develop your own talents.The second best thing is to

buy into other people'stalents. You know, here'sCoca-Cola, and people aregoing to be drinking it 10years or 50 years from now,and they're going to bedrinking more of it, andthey'llmakemoremoney.SoI don't have any idea whatCoca-Cola stock is going todo next week or next monthor next year, but I'm prettydarnsurewherethecompany

willbein10or20years.Andpeoplebeatthemselvesinthestock market. The stockmarket, literally, in the 20thcentury,wentfrom66ontheDow to 11,400. And you'dsaid,‘Howcouldanybodynothaveagoodexperience?’Butmillions of people don'tbecause they get excited atthewrong time, and they getdepressed at thewrong time.So you've got to put your

emotionsaside,you'vegot togiveuptheideathatyoucandecide when to buy stocksandwhen to sell stocks. Thetime to buy stocks isconsistentlyovertime.”

ProstateCancerInApril2012WarrenBuffettannouncedthathehasearly-stageprostatecancer,andindicatedhehadnointentionofsteppingdownasheadofhisinvestmentfirmBerkshireHathaway.InalettertoBerkshireshareholders,BuffettsaidhehadbeendiagnosedwithStageIprostatecancerandwould

undergoradiationtreatmentbeginninginmid-July.Imagingtestsrevealedhehadnocancerinanyotherpartofhisbody,hesaid."ThegoodnewsisthatI'vebeentoldbymydoctorsthatmyconditionisnotremotelylife-threateningorevendebilitatinginanymeaningfulway."Buffettsaidheandhisdoctorshaddecidedonatwo-monthtreatmentofdaily

radiation,whichwouldrestricthistravel"butwillnototherwisechangemydailyroutine.""Ifeelgreat-asifIwereinmynormalexcellenthealth-andmyenergylevelis100percent,"saidBuffett.Thecancerwasdiscoveredduringaroutinemedicalcheck-upthatshowedanunusuallylargejumpinhisbloodlevelofPSA--aproteinthatisaprostate-

specificantigenproducedbythecellsoftheprostategland."Iwillletshareholdersknowimmediatelyshouldmyhealthsituationchange.Eventually,ofcourse,itwill;butIbelievethatdayisalongwayoff,"hesaid.

InconclusionItrustyouhavegainednotonlyanincredibleinsightintoarguablytheworldsgreatestinvestorofall

timebutalsohisdetailedspecificstrategyofinvestmentrules.IamabigbelieverinthepowerofeducationespeciallywhatIcalla‘21stCenturyEducation’.ThatisonetaughtbythosewithaPhDinresultsasopposedtotheeducationofschoolsoruniversitiestaughtbythosegenerallywithaPhDintheory.ThereisnoPhDintheorythatcan

makeyouamillionaireinvestoronlyonelearntbymodellingsuccessfulpeoplelikeWarrenBuffett.AsImentionedatthestartofthebook,andonnumerousradiointerviews,modellingbillionaireswon’tguaranteeyouwillbecomeone.HoweveritcancertainlyhelpyoubecomeamillionairemodellingpeoplelikeWarrenBuffettandentrepreneurs

suchasRichardBranson,SteveJobs,MarkZuckerbergandothers.

Formanythoughjustlearninghowtomakeenoughforacomfortableretirementoranicerlifestyleismorethenenoughrewardforlearningandapplyingthesecretsofbillionaireinvestorsandentrepreneurs.Iwishyouwellonyourinvestment

journeyandIhopeyouhavealsotakensomegreatlifelessons,aswellasinvestmentlessons,fromWarrenBuffetasIhave.AndimportantlyIhopethatyouhaveastrongunderstandingthatsuccesscanberemarkablysimplejustlikeBuffett’sinvestmentstrategyis.Howeversimpledoesn’tcomeeasy.Ittakescouragetoactandtimeandpatienceforresultstooccur.I

wouldbehappytohearyourfeedback,yourideasandthoughtsorevenquestionsyoumighthaveatamie@21stca.com.au.Orvisitmyblogformorethoughtsandlifelessons:jamiemcintyre.com

Iwishyouwell,

JamieMcIntyre

CEOof21stCentury

Education

September2012

http://www.21stCenturyPublishing.com.auFREECALL(Australia):1800999270FREECALL(NewZealand):0800893302

FAX(Australia):0735039021FAX(NewZealand):093587340

JAMIEMcINTYRECo-Founderof21stCenturyEducationJamie McIntyre is the founder ofover12companiesthatturnoverinexcess of $40 million dollarsannually.With reach in industriessuch as education, trading,accounting, finance broking, stock

broking, financial services,recruitment,media,publishingandTV, the 21st Century Group hasgrown to be the largest financialeducationresourceinAustralia.17yearsagoJamierealisedtheworldneededa21stCenturyModerndayeducation rather than the currentout-datededucationsystemcreatedin the industrialisation era of the19th Century. A “21st Century”education that was better thanschooloruniversity and taughtbythose with a PhD in Results, notjust theory. An Education – For

Life! Only 5 years from beingalmostbankrupt,hehadsucceeded- Jamie had become a selfmademillionaire. This incredibleturnaround can be credited toJamie’s extensive research and tothe knowledge he gained fromhissomewhat unconventionalapproach of modeling multi-millionaires, entrepreneurs,investors and success coaches.After producing such outstandingresultsinsomanyareasofhislife,Jamie decided to fulfill a promisehe made to one of his personalmentors and pass on what he had

learnttoothers.Fromthis,the21stCentury Education and the 21stCentury Group was born. Today,Jamie has educated more than450,000 people worldwide andhelpedthousandsachievefinancialabundance and long-term success.Nominated for ‘Young Australianof the Year’ in 1999 for hisachievements,Jamieisasuccessfulentrepreneur,investor,soughtaftersuccess coach, internationallyrenowned speaker andworldleadingeducator, sharing thestage with some of the world’smost successful entrepreneurs

(such as Sir Richard Branson,Harry Dent, Tim Ferriss, andmore). He is also the author ofnumerous globally applaudedpublications such as the best-sellingbooks‘WhatIDidn’tLearnAt School But Wish I Had’ and“Think&GrowRichForThe21stCentury”.

http://www.JamieMcIntyre.com

http://www.21stCenturyEducation.com.au

Conclusion

Thank you again fordownloading thisbook!

I hope this book wasabletohelpyouto(fillintheblank).

Thenextstepisto(fillintheblank).

Finally,ifyouenjoyedthisbook,thenI’dliketoaskyouforafavor,would you be kindenough to leave areview for this bookon Amazon? It’d be

greatlyappreciated!

Click here to leave areview for this bookonAmazon!

Thank you and goodluck!

Bonus:SubscribeToTheFreeLifeSuccessTipsandebooks

WhenyousubscribetoLifesuccessviaemail,you will get freeaccess to a vast range

of exclusivesubscriber-onlyresources. All youhave to do is enteryour email address tothe right to get instantaccess.

These resources willhelpyougetmoreout

ofyourlife–

To be able to reachyourgoals,

Havemoremotivation,

Beatyourbest,

Makemoneyonline,

Health, Fitness +Muchmore

live the life you’vealwaysdreamedof.

I’m always addingnew resources to thetoolboxaswell,whichyouwillbenotifiedofas a subscriber. Thesewill help you live lifetothefullest!

Click here for lifesuccesstoolkit

Or you can access ithere:http://bit.ly/1pX03Lg