Book Review: The Essential Buffett

The Essential Buffett: Timeless Principles for the New Economy by Robert G. Hagstrom (John Wiley & Sons, 2001)

A great starter for those who are new to Buffett-style investing. Provides all you need to know to kick-start as a value-growth based long-term investor.

This book is an extension of the author's first book on Buffett, The Warren Buffett Way.

While the first book is based on examples from Buffett's stock picking decisions, the sequel focuses more on the ideologies and inspirations of Buffett-style investing. The first two chapters are a recap of his first book. It sets the stage by giving an overview of Buffett-style investing, his thinking and his history, growing up as an investor with an acute interest in crunching numbers and thinking independently.

Influences and Inspirations of Buffett's Investing Approach

Having been influenced by his father, who was a stock broker, and his penchant for numbers Buffett tested the stock market at the age of eleven. He read all the books he could during his teens and when he was ready to go to college he already knew most of the subject matter taught in his undergrad classes. Apart from his readings, there are three important people whose teaching and acquaintance greatly shaped Buffett into what he is today.

They were: Ben Graham, Buffett's mentor, employer and the father of value investing; Charlie Munger, Buffett's partner in business; and Philip Fisher, the pioneer of growth investing. Buffett blended the principles from Ben Graham's value based approach, Philip Fisher's "soundness of business growth prospect" approach and Charlie Munger's "great business does not sell cheap" approach.

Tenets of Buffett-style Investment

The author dissects Buffett's principles into twelve investing tenets categorized as Business Tenets, Management Tenets, Financial Tenets, and Marketing Tenets. These tenets form the foundation of Buffett's blended approach to investing. Just by adhering to these tenets and spending time to research about a company can help an investor do better than the market average.

Focused Investing is the Key to Success

The essence of the book is in the concept of focused investing. Buffett thinks of investing as a punch card which can be used for only 20 punches for the lifetime. An investor should be so diligent that he/she should use those 20 punches wisely. The book provides results of a statistical analysis of the performance of sample stock portfolios with varying numbers of stocks.

The results reveal that the fewer the number of stocks in the portfolio, the greater the return over a long term. Needless to say, these stocks should be carefully selected based on sound research, estimate of intrinsic value, and margin of safety.

Ocean of Opportunity in Technology & Emerging Economies

While Buffett has set his foot into all kinds of traditional businesses from candies to insurance, he has always stayed away from the technology industry. The model of traditional businesses has pretty much remained the same since the dawn of time and they will not change. On the other hand, technology business models are ever-changing, evolving and are more competitive.

This book was published at the peak of the technology bubble and there has been a tremendous change in the information and communication technologies. The value of a technology can be calculated using the financial statements. But predicting the growth of a technology company is relatively very difficult.

The book provides a few factors that can be used to evaluate a technology company. But these factors keep changing according to the technology. This industry is an unexplored frontier for a "value-growth' based investor and the author sees a great opportunity in this. Buffett has not invested a lot in other countries. The author sees a plethora of opportunity in emerging economies as well.

This article was originally published on SeekingAlpha

Book Review: Buffett Beyond Value

"Buffett Beyond Value: Why Warren Buffett Looks to Growth and Management When Investing," by Prem C. Jain (Wiley - March 2010)

The most comprehensive, illustrative, elaborate and anecdotal guide to Buffett's value investing principles. A must read for all long-term investors.

This book is written based on extensive research and analysis of decades of Berkshire Hathaway's annual reports, letters to shareholders, academic journal publications and other financial literature. The author himself is a seasoned practitioner of Buffett's contrarian value investing principles. The book contains numerous examples from Buffett's investments and a dissection of the decisions that lead to the investments. The book sets the stage by reasoning why investing in stocks could yield the most return and concretely supporting it with the credible history of Berkshire Hathaway's exorbitant growth.

Value and Growth Constitute Best Investing Strategy

More often, growth investing is associated with speculative upward movement in stock price or the rapid ascent of a high-tech company's stock. Professional investors often view growth investment as the near-term or medium-term speculation based on recent earnings. Most literature on Buffett's investing principles refer to a value investing approach that places emphasis on past performance. This book brings in a fresh new perspective by helping readers see that Buffett's principles are focused not just on intrinsic value but also on the growth potential of the company for many years into the future. It elucidates how to calculate the intrinsic value of a business and to make an investment decision based on it. It also explains how to gauge the future growth potential.

Putting Other People's Money to Work

The book provides classic examples of how Buffett uses other people's money from his insurance and re-insurance businesses to buy more companies that will keep minting money for eternity. The best period to hold stocks is forever. Higher the portfolio turnover the more money paid in taxes. Holding a stock for a long time is akin to getting a loan from the IRS at zero interest, while the net worth keeps increasing year-over-year even with modest price appreciation.

Learn to Reduce Downside Risk - Above Market Returns Will Be Evident

Of all the ways that money can be used to make more money, investing in stocks is the one that has the potential to give the most return. And at the same time, this could let one down the most. In the long run the returns outweigh the risks. But by how much is the question that makes a big difference. While the upside potential is essentially unlimited, the downside is not loosing more that what was invested, at its worst. Anyone can get a return matching at least the market rate by investing in index stocks. But by how much more return can one get above the market is all that makes the difference. This book will definitely provide one with motivation, methods and means to get jump started as a Buffett-type investor.

Numbers Are What Everyone Sees, Quality of Management is What Only a Few See

The book stresses the idea that, while it is important to understand the financial measures of a company, it is as important to understand management and corporate governance. Buffett invests a great deal of time in learning a company's management personnel, style and the decisions made on capital allocation. The author mentions this philosophy in numerous instances throughout the book as well as explains in detail in the final part.

Knowledge, Discipline, Commitment, Patience: Ingredients For Success

The last four parts of the book focus on market efficiency, ability to interpret financial statements, expending quality time and effort, and developing the right mind-set. One can save a lot of time by not looking at the stock price everyday and giving less attention to raining opinions of media. Rather, use that time to study a company and its management more closely. With knowledge comes the confidence and the mid-set to buy stocks in lots when the market is ridden with fear. It is also important to accept mistakes and learn from them. The author highlights Buffett's mistakes as well as acknowledging his own. He recommends keeping an investment journal of self-learning.

Comprehensive Coverage, Lucid Explanations, Truly Motivating

Although the author is highly educated in finance and accounting, he hasn't used any technical jargon in this book. The book is divided into nine parts that flow in a sequence. Each part contains bite-sized chapters. The chapters are filled with solid investment examples and analysis of those examples. Each chapter is concluded with a gist of the entire chapter that helps to recollect and keep track of what was learned from that chapter. The book is studded with numbers and analysis and does not carry any fluff.

This article was originally published on SeekingAlpha

Book Review: "The New Buffettology"

The New Buffettology - The Proven Techniques for Investing Successfully in Changing Markets, by Mary Buffet & David Clark (Rawson Associates Scribner, 2002).

This investor's manual for value investing provides step-by-step techniques used by the super-rich investment guru Warren Buffett to pick value stocks.

The term "Buffettology" may not have secured a place in the Webster dictionary yet, but it sure is the magic word in the dictionary of investing. There have been so much coverage of his decades old wisdom in numerous books, magazines, and all channels of media. His investment principles are as simple as using common sense and understanding the power of compound interest. Yet, many turn a blind eye to them in search of quick profits. Just following the steps that this book teaches could earn a return, better than the market average.

How to Pick Companies to Buy, Rather Than Stocks to Trade

In the first few chapters, the book explains how Warren Buffett stands to differ from the crowd in picking stocks to buy. Most of the investors buy on good news and sell on bad news. Buffett buys on bad news. People are skeptical of a stock when it is beaten up to its lows. But this is when Buffett sees the opportunity of a lifetime. He starts looking deep into the company fundamentals to see if the underlying business model is sound and that the negative even is just a one-time occurrence. Once he is confident in the business he goes and buys with all the cash he can use. He does not believe in buying a little to avoid downside risk. When in doubt he moves on. The author defines this approach as contrarian investment strategy. What Buffett practices is the selective contrarian strategy, where he buys a part or whole of a company which has a competitive durable advantage and its stock price is beaten up due to bad news or recession.

Buy Only Companies With Competitive Durable Advantage

Buffet classifies companies into two types. One is price-competitive-commodity business and the other is competitive-durable-advantage business. Buffet avoids the first type of business, as there are several companies offering the same product or service and the profit margins are narrow due to price competition. Second type of business is the one who has less competition, or has a strong brand name, or has a high inventory turnover to compensate for the low prices. Competitive durable advantage is the strategy that this book emphasizes all over. A company with durable competitive advantage should have earned a consistent return on equity (ROE) of over 12% for at least in the past 10 years. Should have a positive trend in the earnings.

Choosing the Right Opportunity to Buy a Stock

The book gives some great practical tips on when to buy a stock once a company is determined to have competitive durable advantage. It does not mention about looking into a stock chart anywhere. It teaches you how to estimate the underlying book value of a company. And if the stock price is below that at any point of time, it is a great buying opportunity. The market is fearful. That's when Buffett buys them in huge numbers. He lets go if the price is not right. Because according to his principle, the price one pays for a stock determines ones' rate of return. Such buying opportunities come during a bear market, a recession, a calamity, or bad news about a company.

How to Interpret the Financials, Using a Check List, Getting Into And Getting Out of the Game

The book teaches when financial information to look for in a company like Return of Equity, Return of Total Capital, Earnings per Share. It also provides the sources that Buffett uses for his research. It gives a 10 point check list to use before picking a company to buy. The last chapter provides a wonderful template of questions about a company. Answering all the questions will help one decide whether to buy a stock or not. The book also lists all the companies that Buffett had or has invested in in the past few decades and also the rationale behind them. Even he has made his share of mistakes. But was very smart to learn from them.

This book should be in the desktop of all those who seek to invest in the stock market. One additional attribute that the book needs from the reader is patience. This book doesn't speak of a short-term quick buck, but rather long-term, solid wealth creation.

This article was originally published on SeekingAlpha

Pit Bull - Lessons From Wall Street's Champion Day Trader

"Pit Bull - Lessons From Wall Street's Champion Day Trader," by Martin "Buzzy" Schwartz (HarperCollins, 1998)

The book shows how the author Schwartz, a professional day-trader, had developed his acumen for trading in stocks, futures and options. He narrates how he mastered the trading techniques, developed a systematic methodology, combined information, intellect and intuition to become successful in his trading career.

Breathing, Walking and Living as a Day-Trader

Trading in the modern era has become advanced with computer models becoming more intelligent and taking over the trading with less human interaction. Schwartz did the charts, calculations and predictions himself in the 70s and 80s and started getting assistance from computers in 90s.

After his graduation from Columbia Business School, the author started his career as an analyst analyzing companies and stocks. He begins with sharing his experience on the trading floor of the American Stock Exchange. He worked for several investment management companies where he had to travel to interview company executives and analyze the companies in all possible angles and provide an analyst opinion. He became tired of this job and devised a plan to become a champion trader.

Every Stock He Places His Bet On Turns Into Gold

Wisely executing his personalized trading strategies he churned out millions of dollars, like in a fairy tale. He then participated in trading competitions conducted by the Financial Traders Association several times to achieve stardom in the world of trading. With all the expertise he gained, he decided to manage other people's money and started his own investment management company. At a time when he was performing like a star, he became seriously sick and that was the beginning of the demise of the company he started. After he recovered, he downsized his clients and relocated south to Florida to spend time with his family and other things in life that he missed. But he never stops being a trader.

A Must-Read for All Day-Traders

Throughout the book, the author shares some valuable points an every day-trader should ponder like:

• Exclude ego out of the trading equation
• Always stop the losses by exiting a bad trade quickly
• Change tables after a winning streak
• Preparation pays.
• It's essential to know more than the other players in the game
• Have reserves in gold in a locker

At the end of the book, there are some good tips to be a successful day-trader. He explains the methodology and tools he uses, how to analyze the market, and how to interpret the movements and trends in charts. By no means is this a comprehensive guide. But it is a good start. This book is an inspiration for those who want to be a day trader but it does not delve into more detailed technical analysis. The book could have used less narration and more information.

This article was originally published on SeekingAlpha

Book Review: 'Clean Money' By John Rubino

"Clean Money - Picking Winners in the Green-Tech Boom," by John Rubino (John Wiley & Sons, Inc., 2009)

This book is a must read for all investors as well as those interested in learning about technological advances in the alternative energy. It is comprehensive in the sense that it covers all areas of clean and green technologies. It is brief in the sense that it explains only the information needed by any investor to be well aware of anything green before making an investment decision. The book uses less technical jargon and is an easy read.

Transformation of Oil Economies to Green Economies

First part of the book conveys a strong message that humans need to adapt again to old ways of living. We have been using earth's resources unscrupulously and at an accelerating pace to fulfill our insatiable lavish living lifestyles. It is a harsh realization that the resources like oil and forest that we thought were in abundance are, in fact, limited. The earth cooled itself by absorbing zillions of tons of carbon-dioxide by ancient life forms and stored it as oil. Now we have been and are warming up the earth again by releasing all the trapped carbon and sublimely destroying our own habitat.

We have reached the critical hour and it's the most opportune time to act. And we are waking up. Energy companies and scientists are embracing technologies to maximize utilization of renewable energy forms like solar, wind, tides, geothermal etc. The next boom or bubble is about to start along the lines of the industrial bubble of the early and mid 20th Century and the Internet bubble of the late 90s.

The book not only provides a repository of publicly traded companies and private venture funded companies that are in the verge of going public, but also provides a lucid explanation of each of the emerging technologies for the novice.

Alternative Energy Stocks to the Rescue

The second part of the book details all the recent trends in energy generation, storage and distribution. Huge strides are being made in solar power, battery technologies, hybrid automobiles, efficient power distributions using smart grids, biofuels and so forth. The chapters list companies of all sizes, public, private and the with potential to become public, what green technologies have failed, what may fail or succeed. It also lists clean tech public companies with their stocks' ticker symbols across global markets (stock exchanges).

Listed below are some of the key publicly traded alternative energy technology companies listed in the U.S. as mentioned in the book:

• Solar Power: First Solar (FSLR), Evergreen Solar (ESLR) Energy Conversion Devices (ENER), SunPower (SPWR)
• Wind Power: General Electric (GE), Siemens (SI), Valmont Industries (VMI)
• Geothermal: U.S. Geothermal (HTM), Ormat Technologies (ORA)
• Energy Storage: P&G/Duracell (PG), Johnson Controls (JCI), Enersys (ENS)
• Bio Fuels: Archer Daniels Midland (ADM), Bunge (BG), Andersons (ANDE)
• Fuel Cells: Air Products (APD), Praxair (PX), United Technologies (UTX)
• Smart Grid: IBM (IBM), Itron (ITRI), American Superconductor (AMSC)

Water and Waste Are Gold

The third part of the book discusses clean technologies related to human necessities of water, living space, food and the by-product of human consumptions, pollution. With the ever increasing human population there is a dearth of fresh water even for people in developed countries. There is a huge growth potential in water related stocks. With increasing cost of power and pervasive talk of corporate social responsibilities, companies are building LEED certified buildings, retrofitting existing office spaces, reducing inefficiencies, and conserving energy. All these are possible with green building technologies and green materials. With depleting arable land, scarcity of irrigation, and an increasing number of mouths to feed, agriculture related stocks are to be watched very closely. Cleaning up the trash we have been dumping into earth in all its forms, namely, land, water and air, is also a big business.

The final part of the book gives some historical viewpoint of bubbles and bear markets and possible strategies to invest in these green technologies in either directions, up or down. It gives some valuable tips on different ways to invest in these stocks via alternative energy funds, ETFs and foreign markets.

Use This "Pocket" Book to Prepare for the Boom in Green Energy Stocks

The emergence of the global economy out of the financial crisis of the beginning decade of this 21st century will be the harbinger of the green tech boom. There have been few green tech bubbles in the past, but this time the bubble will be prolonged and huge. The book should be in the desk, not in the shelf, of every investor who wants to renew ones' portfolio with these green baby stocks.

This article was originally published on SeekingAlpha

Book Review: A Beginner's Guide to Day Trading Online

By Toni Turner (2nd edition, Adams Media, 2007)

This book provides everything one needs to know to start trading stocks online by helping analyze charts, news, buy-sell strategies and cherry picking.

Trading Versus Investing

Before venturing into stocks as a means of income one needs to clearly understand the difference between investing and trading. Investing involves buying a part of a company through stocks by understanding its business model, financial stability, earnings sustainability, etc. whereas trading is buying and selling a stock with less regard to the nature of the company or its operations. Investing requires patience and long-term time commitment in terms of months to years, whereas trading is buying and selling stocks in a time-frame ranging from minutes, hours to days and a few weeks.

One Cannot Beat the Market but Can Swim With It

Trading may seem like it will give infinite returns. Novice traders think they can churn money from the market, only to find out it is just not possible to win the market. With solid and abreast information and the knack to read the charts one can reduce the losses. Losses are part of the game. A trader needs to embrace it and learn from it. Emotions such as fear, anxiety, frustration, and greed should be kept aside while trading.

Understand How Stock Markets Work, Choose a Trading Style

The book explains the stock market fundamentals. How the stocks are traded by brokers on the floor, and online brokers providing market access to individuals. How the market makers, analysts, institutional investors, fund managers control the market. It's an ocean infected with hungry sharks. Loners fishing for small fish are at greatest risk if they don't understand catch tactics. Traders should choose a style based on their time and other commitments. Day trading requires 100% of all senses focused on the trading screens. Strategies to adopt for different trading styles are discussed in moderate detail.

Brief Illustration of Technical Analysis and Numerous Illustrations on Chart Patterns

The book discusses all the frequently used technical indicators on charts but does not provide a very detailed explanation. For beginners, this should be of good help. There are other trading books dedicated entirely to technical analysis, which the author references at the end of the book. The book is filled with ample real examples of chart patterns with pointed explanations for each chart.

Emphasis on Psychology of Trading

Time and again, the book stresses the importance of virtues of a day-trader. One needs to learn to control emotions, assimilate losses, not lose temper, and take breaks from trading when the odds are acting against one's moves. All these can be achieved by proper planning, having the market information at finger tips. The book gives great pointers on controlling emotions. At the end of each chapter, the author provides some inspirational excerpts called "Center Point." They help the reader to step aside from the "money mind" for a moment and look at life from a Martian perspective.

A Must Have Book for All Beginning Day-Traders

This book can be kept as a quick reference while learning the trade of trading the stock markets and should be read before testing the market with real money.

For a review of a book on a typical life of an aggressive full-time day-trader read "Pit Bull" by Martin "Buzzy" Schwartz.

This article was originally published on SeekingAlpha