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Thread: weekend commentary - investment philosophies

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    Default weekend commentary - investment philosophies

    (snip)"Warren Buffett, one of the world's greatest investors, said, "Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing."

    Many financial advisors recommend that you diversify for your own protection. What they fail to tell you is that it is also for their protection. Since most financial advisors cannot tell you exactly which stock or mutual fund is a great investment, they tell you to buy a bunch of them.

    Instead of diversifying, my rich dad taught me to focus on finding the best investments. That meant sifting through hundreds of offers, studying, analyzing, and determining the pros and cons of each. Learning to focus was one of the best real-world business lessons I received from my rich dad. It helped me become a better entrepreneur and investor. Focusing on investments also allows me to make more money with less risk, because I'm not buying a bunch of sub-par assets and praying they will do something."(snip)

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    Default Re: weekend commentary - investment philosophies

    I'll throw in another snip from Mr. Kiyosaki's article (boldface emphasis by me):

    If, however, you decide to become a professional investor, the price of entry is focused dedication, time, and study. Warren Buffett dedicated his life to becoming the best investor he could be. That is why he focuses and does not diversify. He does not need to protect himself from ignorance simply because he has invested time and money to understand what he is doing.
    _________

    And if somebody can afford that focused dedication, time, and study, then more power to them. But I think after an already exhaustive work schedule, most of us would rather be spending time with our loved ones, or on our hobbies, or enjoying a nice vacation somewhere as opposed to pouring over stock analysis charts.

    While "diversifiers" may never achieve the financial success of a "focused" investor, we sometimes neglect the fact that focused people often pay a tremendous cost in other aspects of their life to achieve their level of success in whatever endeavor they succeed at. You can't take it with you when you die after all.
    Former SCJ now in rehab.

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    Default Re: weekend commentary - investment philosophies

    Diversification is also protection against random chance. Take any great company run by a great person, say Mr Buffett. You have no insurance he will not have a heart attack in his sleep tonight, he might be arrested, or an asteroid hit the headquarters, or even that a laft field technology change could alter the co's prospects.

    Look at the list of Berkshire Hathaway owned companies (at http://www.berkshirehathaway.com/subs/sublinks.html)
    It is 42 companies, a third more than the numebr in the Dow Jones Industrials. That is diversified!.

    From the first line of the BH 2004 annual report "
    Business Activities

    Berkshire Hathaway Inc. is a holding company owning subsidiaries engaged in a number of diverse business activities."

    http://www.berkshirehathaway.com/2004ar/2004ar.pdf

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    Default Re: weekend commentary - investment philosophies

    I dont think you can say that BH is diversified because it owns more companies than the number of those that make up the DJI. Generally he only invests in 3 types of companies. I bet all 42 fit into one of those.

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    Default Re: weekend commentary - investment philosophies

    lunchbox,

    You had better look again. there is everything from furniture stores to jewelery stores, to mobile home makers, to hardwood floor companies. Also throw in candies, bricks, underwear makers as well as a smattering of insurance companies amd a few electric utilities. Also it is a mistake to consider all insurance companies the same. A life insurance company and a car insurance company are entirely different animals than a reinsurance company or a property and casualty insurer. furniture stores are also diversified by region.

    Also midern portfolio theory says you only need 20-25 companies in a portfolio to diversify away the single event risk. It is just the right mix of 25 companies.

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    Default Re: weekend commentary - investment philosophies

    Re: Buffet and RICH DAD, RICH DAD!

    Great suggestion, if you are independantly wealthy and have access to as much information as a financial professional or business leader (http://en.wikipedia.org/wiki/Howard_Buffett), as well as the time, training, and temperment to do so. But your average joe simply wants a decent return on their investment that isn't going to be sucked up by inflation. Anyone average invester who thinks otherwise is going to wind up chasing a bunch of trends, possibly lucking out, but most likely going to lose it all. Play the lottery,your chances aren't much better.

    Diversifying your investments is like eating balanced meals of all the food groups. Sure ,you might live healthy until 100 eating red meat 3 meals a day, but history and experience shows us that you are most likely NOT to have such luck. Thus, protecting yourself is a no-brainer.

    What's your point Melonie? These girls trust your word as gospel. Are you trying to disseminate poor advice for a reaon? What's the motivation?

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    Default Re: weekend commentary - investment philosophies

    What's your point Melonie? These girls trust your word as gospel. Are you trying to disseminate poor advice for a reaon? What's the motivation?
    not at all ... I'm merely trying to suggest that they apply / trust their own brainpower, and take the advice of stockbrokers / financial advisors with a 'grain of salt'.

    Diversifying your investments is like eating balanced meals of all the food groups. Sure ,you might live healthy until 100 eating red meat 3 meals a day, but history and experience shows us that you are most likely NOT to have such luck
    By the same token, diversifying your meals means eating truffles & Kobi beef & caviar, and also eating Happy Meals and Pizza, but also eating garbage and poison ! I suspect that Warren Buffet would argue that it doesn't make sense diversifying into garbage and poison.

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    Default Re: weekend commentary - investment philosophies

    Quote Originally Posted by montythegeek
    You had better look again. there is everything from furniture stores to jewelery stores, to mobile home makers, to hardwood floor companies. Also throw in candies, bricks, underwear makers as well as a smattering of insurance companies amd a few electric utilities.
    By type of business, I'm not saying what it actually does. People are not going to stop building homes with brick and hardwood floors or living in manufactured ones, nor are they going to stop wearing underwear, eating candy, chewing gum, wearing jewelry, and using electricity.

    He did not invest in anyone of these specifically based on it's own merit, he's buying value in consumer goods that have been around and will continue to be around. Keep in mind with total ownership/control he eliminates a lot of risk that we as shareholders would take.
    Also it is a mistake to consider all insurance companies the same. A life insurance company and a car insurance company are entirely different animals than a reinsurance company or a property and casualty insurer. furniture stores are also diversified by region.
    In reverse. Furniture is an excellent business to be in regardless of location, the margins are just that good. I bet his loactions are somewhat of a local monoply, just like DQ's are (or at least were up till recently) the only game in many small rural towns.

    All insurance companies have one thing in common, and it is the fundametal rule that made him what he is: you can make more investing with other people's money, than just your own. He's into insurance for the cheap capital.

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    Default Re: weekend commentary - investment philosophies

    Quote Originally Posted by lunchbox
    By type of business, I'm not saying what it actually does. People are not going to stop building homes with brick and hardwood floors or living in manufactured ones, nor are they going to stop wearing underwear, eating candy, chewing gum, wearing jewelry, and using electricity.

    He did not invest in anyone of these specifically based on it's own merit, he's buying value in consumer goods that have been around and will continue to be around. Keep in mind with total ownership/control he eliminates a lot of risk that we as shareholders would take.

    In reverse. Furniture is an excellent business to be in regardless of location, the margins are just that good. I bet his loactions are somewhat of a local monoply, just like DQ's are (or at least were up till recently) the only game in many small rural towns.

    All insurance companies have one thing in common, and it is the fundametal rule that made him what he is: you can make more investing with other people's money, than just your own. He's into insurance for the cheap capital.
    I beg to differ with you lunchbox. For example one of the furniture companies he has in the portfolio is Jordan's furniture, located here in Mass. It has by no means a monoploy, and is not the best place to buy furniture. It does have good stuff, but its margins are eaten by flashy stores and marketting costs. The hardwood floor company (Shaw's) is by no means the best, or the biggest. It is just a well run company.

    Your knowledge of the insurance industry is somewhat based on misconceptions. To even attempt to do as you suggest would put WB in jail. It is a highly regulated industry and ratings agencies all all over your ass looking for any chink in your armor. Your investment returns are audited tighter than any mutual fund, and has to be liquid (ie gov't bonds and the like), not equity holdings in companies.

    WB is precisely buying busineses on their own merit. That is why he was so glad to have bought Gillette and that it merged with P&G. He by no means held a controlling stake, nor does he in most. Both comapnies were excellently run companies with solid consistent returns on assets and good growth prospects, especially in LAtin America and Asia.

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    Default Re: weekend commentary - investment philosophies

    I'm not going to split hairs with you about furniture and floors in a state I've only been to twice. Could you source me on that insurance bit, I think theres a % cap for unsecured, or maybe a ratio, but nothing of the extremes you are describing.

    WB is precisely buying busineses on their own merit.
    incorrect.
    excellently run companies with solid consistent returns on assets and good growth prospects
    Correct, but incomplete. Let's not lose sight of the fact that WB is 'the famed value investor'. He wouldn't buy anything based on anything if it wasn't a bargain first.

    I don't see how you can say it's diverse just because evertime he buys somehting the same company doesn't represent the best value. He's buying under the same guidelines (what he knows), it doesn't matter if the store sells furniture, company sells coke, makes razors, etc. etc.

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