Monday, February 25, 2008

Warren Buffett: How to Make 50% Per Year

Warren Buffett achieved 50% return on small capital during his early years. When asked how he would try to do it again today, he shared the following ideas:

Focus on things that are knownable and important.

I don’t care about a possible recession; I don’t spend a minute thinking about it. The next 20 years should be good; we’re in the game forever. We focus on things that are knownable and important. We don’t know how to forecast, it’s meaningless to us.

We will win by playing our game or finding weak opposition.
We look at ourselves as golfers. We don’t know which holes will come and in what order, but over 18 holes, we will win by playing our game or finding weak opposition. See’s Candy, Coca-cola – nothing else is in your mind when it comes to candy or soda. Share of mind equals share of market.

Attractive opportunities come from observing human behavior.
In 1998, people behaved like frightened cavemen (referring to the Long Term Capital Management meltdown). They will be frozen by fear, excited by greed and it doesn’t matter what their IQ, degrees etc is. Growth of 50% per year is with small capitalization, not large cap. It’s just capitalizing on human behavior. It’s human emotion that make opportunities when people are frozen by fear or excited by greed. Human behavior allows for success if you are able to detach yourself emotionally.

Seek out publishers of stock information and look for various investment guides.
Go through every manual page by page. I recently bought a copy of the 1951 Moody off of Amazon. On page 1433, there’s a stock you could have made some money on. The EPS was $29 and the Price Range was from $3-$21/share. On another page, there is a company that had an EPS of $29.5 and the price range was $27-28, 1x earnings. You can get rich finding things like this, things that aren’t written about. Look through investment guide on Korean stocks.

Look for simple things that can't go wrong.
In your investing life you will have several opportunities and one or two that can’t go wrong. For example, in 1998 the NY fed offered a 30-year treasury bonds yielding less then the 29-½ year treasury bonds by 30 basis points, because Long Term Capital was trying to get out of a highly leveraged trade.

Warren Buffett said: "If you try to be a little smarter, you may end up a lot dumber." At Zenway.com, we stick to what is simple and understandable. Our Zen of investing is getting back to the basics, apply ancient tried-and-true mind development techniques, and focus on doing simple things extraordinarily well.

Brian Zen, CFA
http://www.zenway.com - from wisdom to wealth

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