Read this interesting article on the "Basics of investing from Warren Buffet" featured in the newspaper ( Mint ).

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Friday , February 28, 2014
Basics of investing from Warren Buffett (also see in Jpeg)
Publication: Mint , Agency:Bureau, Edition:Mumbai/Ahmedabad/Pune/Bangalore/Chennai/Hyderabad/Kolkata , Page No: 16, Location: Top­Center , Size(sq.cms): 720
Basics of investing from Warren Buffett
The veteran investor's advice to his
company's shareholders remains the same
age­old formula­buy and hold for the long
term
B Y RAJESH KUMAR
rajesh.k@livemint.com
T
he annual letter to the
shareholders by Warren
Buffett, one of the most
successful investors of all time,
is an eagerly awaited event in
the world of investing. Every
word from the "Sage of Omaha"
is followed by investors across
the world. This time was no
different. An excerpt of his
annual letter was published by
t h e Fortune magazine on its
website on 24 February and is
being discussed all over the
world.
Warren Buffett, according to
the Forbes, had a net worth of
$58.5 billion as on September
2013. Buffett is chairman and
chief executive officer of Berk­
shire Hathaway Inc. The com­
pany and its subsidiaries are in
diverse businesses including
insurance and re­insurance, fi­
nance and manufacturing.
The published excerpt is ba­
sically an essay on fundamen­
tals of investing, which can be
followed by all investors to
maximize gains in the long term.
The basic essence of the essay
is that it does not require a
great deal of expertise to be a
successful investor.
However, it does require a
great amount of patience and
the ability to ride through
business cycles. Buffett this
time illustrated examples of his
two real estate deals to drive
home the point that one needs
to identify a good investment
idea and then hold on to it for
the long term to reap gains.
Here are five key takeaways
from his essay that investors
can use while putting in their
money.
Keep it simple
In order to get reasonably
good returns, you don't need
to be an expert in the asset
class that you are investing in.
In order to explain this, Buffett
uses the example of a farm that
he bought in 1986. He had very
little idea about farm opera­
tions. But with the help from
WHAT I LEARNED FROM
WARREN BUFFETT
his son, he did a quick calcula­
tion on how much the farm
will yield and what will be the
operating cost. Around 28
years down the line, the output
of the farm has gone up three
times and its value has gone up
five times. The basic argument
is that you need to "keep
things simple and don't swing
for the fences".
Long­term approach is
the on!y right way of
investing.
­Parag Parikh
'chief executive officer, PPFAS AMC
Focus on productivity
Buffett argues that you need
to understand the future earn­
ing potential of the asset that
you are buying. If you are not
able to do that, just move on.
The idea here is that you must
understand the business or the
asset that you are buying.
Buffet and his partner, Char­
lie Munger, evaluate business­
es in the same way irrespective
of whether they are buying a
small stake in the business or
the entire company.
Buy and hold works. You
need to find an
outstanding company and
hold it for the long term.
Avoid predicting price
changes
­Raamdeo Agrawal
joint managing director, Motilal
Oswal Financial Services
Avoid constantly tracking
stock prices
The company must earn
a healthy return on
capital and should be
able to generate free
cash flow.
Thinking about price chang­
es is speculation. Also, Buffett
argues that something that has
appreciated in the recent past
should not be your reason for
buying. People tend to buy
when prices have run up quite a
bit and sell when it has already
fallen. Investors, in fact, should
be doing exactly the opposite.
"A climate of fear is your
friend when investing; a eu­
phoric world is your enemy,"
Buffett wrote.
Buffett's style of investing is
that once you have bought an
asset, you should not be wor­
ried about its price every day.
This is what normally happens Saturdays and Sundays with­
in real estate investments. out looking at stock prices,
People don't go out to buy and give it a try on weekdays."
sell every day.
However in the stock market, Don't waste time on
since prices are available on a macroeconomic and
real­t i m e b a s i s , t h e r e i s market predictions
Listening to market predic­
temptation among investors ito
do something which should be t i o n s a n d m a c r o e c o n o m i c
opinions, according to Buffett,
avoided.
Says Buffet: "If you can enjcsy is of no use in investing. The
message is that once you have
bought a good asset, you
should hold it for the long term.
—Vetri Subramaniam,
chief investment
officer, Religare
Invesco AMC
There will be economic and
business cycles in between but
a good asset, bought at a rea­
sonable valuation, will give
you good returns in the long
run.
Buffett further says that if
you are a non­professional and
cannot pick stocks, you still
have an option of investing in
stocks. All you need is a
diversified portfolio of good
businesses which you can
easily own through index
funds.
"The goal of the non­profes­
sional should not be to pick
winners—neither he nor his
" h e l p e r s " c a n d o t h a t—but
should rather be to own a
cross­section of businesses
that in aggregate are bound to
do well," he argues.
Most of the things that Buf­
fett talked about in his essay
are not new for people who
follow the principles of value
investi n g . S a y s R a a m d e o
Agrawal, joint managing
d i r e c t o r , M o t i­l a l O s w a l
Financial Services
Ltd, "It is the reiteration of
what he has said before, which
i s b as i c a l l y b u y a n d h o l d
works."
Experts argue that investors
should buy good companies
and hold it for the long term. In
case you find it difficult to
identify stocks, you can simply
invest through an index fund
which is also cost effective in
terms of management fee.
The idea is to own
businesses which will do well
and create wealth over time.