How to Pick Stocks Like Warren Buffett

[npg]

Although the title is unapologetically corny, this is the best book I read on the subject to date. Something worth highlighting is the ample time that is spend on the power of compounding -- a key cornerstone in any superinvestors strategy and something I highlighted in my posts for quite some time. For us, understanding this is even more important because it is our lack of appreciation of this powerful tool that gets us in trouble when making investment decisions.

The books section about valuation is about as complicated as it should be. I particularly liked the part where is clearly shows how to work out intrinsic value using a discounted cash flow model (a much better job than monish did in his book). Apart from the extensive and brilliant treatise about the power of compounding sections like 'Understanding Return on Equity' and 'Book Value' alone make it worth the purchase price.

Rather than spend ludicrous amount of money (ie in excess of 700$) for an average book (Margin of Safety - Seth Klarman) a purchase of this book should fill the gaps that Phil Town's Rule#1 left wide open.

I highly recommend it. Ignore at your own peril.

[Straddle]

This one was my first book on investing in stocks. I liked at from the beginning to the end. The author highlights and repeats the basics of value investing (buying at low prices, considering time as tool to develop the power of interest compounding, only buy stocks from top firms, ...). Only downside is that isn't so practical to use in practice, as some other books are.

[.Smitty.]

I just picked up this book on your recommendation, npg. Hopefully I'll read through it within a week or so, but I'm not sure.
I'll report back with what I thought of it after I'm done! Page 1 starts...now.

[am13539]

Originally Posted by npg

Although the title is unapologetically corny, this is the best book I read on the subject to date. Something worth highlighting is the ample time that is spend on the power of compounding -- a key cornerstone in any superinvestors strategy and something I highlighted in my posts for quite some time. For us, understanding this is even more important because it is our lack of appreciation of this powerful tool that gets us in trouble when making investment decisions.

The books section about valuation is about as complicated as it should be. I particularly liked the part where is clearly shows how to work out intrinsic value using a discounted cash flow model (a much better job than monish did in his book). Apart from the extensive and brilliant treatise about the power of compounding sections like 'Understanding Return on Equity' and 'Book Value' alone make it worth the purchase price.

Rather than spend ludicrous amount of money (ie in excess of 700$) for an average book (Margin of Safety - Seth Klarman) a purchase of this book should fill the gaps that Phil Town's Rule#1 left wide open.

I highly recommend it. Ignore at your own peril.

npg,
I am currently reading the book and looks very, very good. Question: Exactly how does arbitrige work and how can a small investor benefit from this?
Thanks.

[joshuat]

In general, arbitrage is buying something that is selling cheap at one place, and selling it at a minor profit where it is selling slightly higher.

You can do this with stocks when buyouts are announced. XYZ announces that they will buy AAA for $30. AAA shoots up to $30, but then it falls off. You buy at, say, $29, wait for the deal to close, and get your $30.

However. You need to have a lotof these running concurrently for it to pay off. Any individual deal can fall through, and the risk/reward ratio is not friendly. Say AAA was selling at $23 at the time of the announcement. If the deal falls through, it will probably fall to at least that. So, your upside is $1, your downside is -$7. This ignores intrinsic value, but generally we are trading these, not investing as such. It is typical to have 100 or so positions on at a time to mitigate this risk. Greenblatt goes into this in detail in his book "How to be a Stock Market Genius" (corny title, but by far the best out there for value investing in a non-Buffett mold).

Example: Buffett recently announced he was buying Constellation. With all the market turmoil, the stock price actually dropped on the news! I bought a small stake, and turned it over when the price finally responded to the news. Instant profit. Small in % points on an absolute basis, but when you annualize it it becomes very attractive. I didn't have another 99 positions on, but when Buffett gives his word, he doesn't back out, so I saw minimal risk. This was a very rare case, don't count on the next Buffett offer to cause a price to fall!

ETA: I hope the take home message is that arbitrage is for experts only. There is a lot of risk in it.

[am13539]

Joshuat,

Thank you so much for your help. Yes. Arbitrage seems to be a difficult concept but one worth studying closely. Where did you find out about Buffet buying Constellation? Was there somewhere specific that you went? Again, thank you for your help.

[joshuat]

I don't remember where I read it.

However, I do have google alerts set up for everyone/thing I find interesting, such as Buffett, all the stocks I own, etc.

I'm not big on these fast in/out things, but this seemed like a good bet. It was, in retrospect.

[am13539]

Thanks for your help. You recommend Mr. Greenblatt's book. I haven't read it but hopefully will soon. What other books do you recommend?

[hitone395]

or you could pick BUD and play the difference between $70/share for the takeover price and currently under $65/share. Since the shareholders approved the sale the only risk is if someone backs out at the last second. If that happens, you still have a pretty good company in BUD.

[am13539]

hitone395,

Thanks for the heads up. I am still to new at this and but will continue to study it in depth.