Wednesday, March 29, 2006

Story about Students Visit with Buffet

Another site has a long posting on Columbia MBA students' Q&A session with Buffet. I haven't read all of it yet, but it did get linked to from Motley Fool and thought it was worth a link based on my recent postings.
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Thursday, March 23, 2006

Buying Apple and AMD

In my last post I described my good fortune in purchasing stock in Apple and AMD in the late summer of 2002. I did not do a full "Buffet style analysis" of either stock. However in each case I think I took a rather reasonable short cut to the same conclusions.

In the case of AMD I had been casually following the stock for about a decade. Historically AMD's stock price had been very cyclical and by understanding the cycles and what drove them one could make money on AMD in a very non-Buffet like trading pattern. AMD's cycles were driven by its competition position with Intel. (In fact regardless of other revenue streams, the position with relation to Intel seemed to be the only thing driving the stock price.) This knowledge allowed me to have a general idea of when the market was giving AMD an unrealistically low valuation. I also had a friend who did do a full Buffet style analysis and valuation of AMD and was nice enough to share that with me. Both these factors told me AMD was a good value buy in the summer of 2002. (Note however that it was down 50% just a few months later.)

In the case of Apple I invested based on 3 factors:
  • Apple had cash equal to about two thirds of its market valuation. This meant that if the price dropped an other 30% someone could have bought the whole company for its cash assets. Any money made by selling off other assets would be profit. (Ignoring any value in the operations.) This put a reasonable floor on any potential loses from an investment in Apple.
  • Apple had a small but faithful set of core customers, so I saw no reason to believe all of the rumors of impending doom.
  • With OS X released and the iPod out, I thought Apple was in better position than it had been in for many years. OS X meant that Apple has an OS that was once again vastly better than what was available in the Microsoft world. They had in fact done what many companies had failed to do, they made UNIX user friendly! I thought the iPod was an interesting device, but didn't really think it would be nearly as successful as it has been,
To me these factors meant that buying Apple was a "no brainer."

In short it is possible for someone without 40 or 80 hours a week to devote to looking for good companies to buy at excellent prices, to find one. However also as Buffet and Hagstrom would point out, it doesn't happen often so when it does you should load up on the stock. That is my only regret with these two purchases. In my IRA I had little to invest. And my non-IRA account had been badly reduced by risky plays that ended in big loses after the dot com bubble burst and the Sept. 11th terrorist attacks.

I have finished reading The Warren Buffett Portfolio by Robert G. Hagstrom. It was an interesting book, with many little stories about Buffet, Benjamin Graham, and others. Fairly easy reading about focus investing. Very little about details of stock analysis as Buffet does, for that information you will have to look else where. It can be summarized as follows: Since you get almost all possible diversification with only 12 holdings, if well selected, there is no reason to hold huge numbers of stocks (like most mutual funds).
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Friday, March 03, 2006

Investing Styles

I am now two thirds of the way through The Warren Buffett Portfolio. I realize as I read it that I have at times followed a number of the strategies described, both good and bad. The reason I wanted to read about Buffett's strategy was that I have come to realize I am following it to some degree. I say to some degree, because for Buffett searching for good investments is his day job. I unfortunately have to work a different job during the day and can only spare a few hours a week to tend my portfolio. I plan to expand on implications of that difference in a later posting.

However as I said I have come to understand the some of the truth in Buffett's investing philosophy. I believe that it is one thing to know something, it is another thing to grok it. To understand why it is that I am beginning to grok the Buffett strategy we need to look at my experience managing a modest IRA account.

In the summer of 2002 I moved a small 401(k) account from a previous employer into an online discount trading IRA account. Since 2002 that small account has grown to 4 times its original value. While I have had only a few bad picks and mostly good picks that any fund manager would be proud of, the bulk of that growth is due to just two stocks I bought at the very beginning.

AMD is a stock that I have followed since the early 90's. I bought it for a little under $10 a share during the late summer of 2002. As you can see in the AMD graph from Yahoo to the right, AMD has climbed quiet a bit since then. But Apple has done even better. My Apple purchase is up 882% since then, and peaked just under 1000% a couple of months ago. The AMD purchase is up about 533% to date. Given that performance other stocks that are up 40% or 50% seem like laggards, little better than the stocks I lost money on.
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