Flip-flopping is nothing new to the “stockerati,” the financial experts who more or less regurgitate the front page of the day’s Wall Street Journal on TV and call it their own brand of biting stock analysis. 

But that doesn’t seem to bother anyone. We’ve come to expect it…

Most members of traditional financial media promulgate investment ideas, only to jump aboard the next business bandwagon when the situation changes. They do it unapologetically – after all, why wouldn’t they change their tunes at the drop of a hat if they knew that they wouldn’t be called out on it.

It takes intestinal fortitude to admit when you’re wrong. It takes even more to say that your dumb decisions cost investors money. Warren Buffett did both.

Is it a surprise that the most honest investor on Wall Street is actually based in Omaha, Nebraska? Probably not…

The Investor with Integrity

Buffett is the Chairman and CEO of Berkshire Hathaway, and the second-richest man in the world according to the Forbes list of the 400 richest people. He’s also known as the world’s best investor.

So then, why is he outing his mistakes to millions?

“During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt. Furthermore, I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action,” he announced in his latest letter to shareholders.

But it’s that very admission of guilt that makes Buffett what every investor should aspire to be. It’s what separates Buffett from the stockerati that tries so hard to imitate him.

After all, Buffett’s performance could have been much worse for the year. In 2008, Berkshire Hathaway outperformed the S&P 500 by 27.4%, meaning that the Oracle of Omaha’s investments held up significantly better than the rest of the stock market.

Others would have touted the year as a success – after all, he performed better than most mutual funds, a plethora of hedge funds, and most individual investors – Buffett didn’t.

Three Lessons to Learn from the Oracle’s Mistakes

Because those who forget their stock market mistakes are doomed to repeat them:

1. Don’t Seek Approval – Per Buffett, “Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”
2. Understand What You Own – “Recent events demonstrate that certain big-name CEOs (or former CEOs) at major financial institutions were simply incapable of managing a business with a huge, complex book of derivatives. Include Charlie [Munger] and me in this hapless group,” he said.
3. The Market Can Be Wrong – “The investment world has gone from underpricing risk to overpricing it. This change has not been minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms.”

It’s hard to see the market clearly when things look as ominous as they do only three months into 2009. Sellers are overwhelmingly pushing the direction of the market today, but that pace can only be kept up for so long. Keep Warren Buffett’s advice in mind, and you’ll end this debacle with your head above water.

Cheers,
Jonas Elmerraji

March 3, 2009

Learn from the Dumb Things Buffett Did in 2008 was originally featured in the Penny Sleuth.

You see, the form 13-F discloses all of Berkshire Hathaway’s stock positions as of March 31. Who wouldn’t want to take a peek at Warren Buffett’s portfolio?! In an article titled “The 38 Stocks in the Buffett Portfolio,” Morningstar.com published the details of form 13-F.

 Here is Buffett’s portfolio (ranked by Morningstar from the largest holding to smallest; foreign stocks are right at the end):

1. Coca-Cola (NYSE:KO)
2. American Express (NYSE:AXP)
3. Wells Fargo (NYSE:WFC)
4. Procter & Gamble (NYSE:PG)
5. Moody’s (NYSE:MCO)
6. Wesco Financial (AMEX:WSC)
7. Anheuser-Busch (NYSE:BUD)
8. Washington Post (NYSE:WPO)
9. ConocoPhillips (NYSE:COP)
10. Ameriprise Financial  (NYSE:AMP)
11. Wal-Mart (NYSE:WMT)
12. M&T Bank (NYSE:MTB)
13. USG Corporation (NYSE:USG)
14. American Standard  (NYSE:ASD)
15. First Data (NYSE:FDC)
16. H&R Block (NYSE:HRB)
17. Comcast (Nasdaq:CMCSA)
18. Costco Wholesale (Nasdaq:COST )
19. General Electric (NYSE:GE)
20. Tyco International (NYSE:TYC)
21. SunTrust Banks (NYSE:STI)
22. Nike (NYSE:NKE)
23. Gannett  (NYSE:GCI)
24. Gap (NYSE:GPS)
25. Home Depot  (NYSE:HD)
26. Torchmark (NYSE:TMK)
27. Iron Mountain (NYSE:IRM)
28. Lexmark International (NYSE:LXK)
29. United Parcel Service (NYSE:UPS)
30. Outback Steakhouse (NYSE:OSI)
31. PetroChina (NYSE:PTR)
32. ServiceMaster (NYSE:SVM)
33. Sealed Air (NYSE:SEE)
34. Pier 1 Imports (NYSE:PIR)
35. Lowe’s Companies (NYSE:LOW)
36. Comdisco Holding (OTC:CDCO.OB)
37. Tesco PLC (OTC:TSCDF.PK)
38. Kingfisher (OTC:KGFHY.PK)

Now, one way to replicate Buffett’s portfolio is to buy his investment vehicle, Berkshire Hathaway (NYSE:BRK-B). The stock is trading at about $3,070. The stock has tripled since 1996.

Or, you can be more adventurous and pick your own stocks. Remember, we’re replicating Buffett’s strategy, not necessarily his entire portfolio stock by stock. And Buffett’s money making strategy is very simple — don’t overpay for a stock. That also means never overpay for earnings growth. Also, if you looked at the stocks above, most of them pay good dividends. So the key to investing is: Buy stocks at a reasonable price and buy stocks that pay dividends.

Here is a quick but powerful formula:

PE ratio / (growth rate + dividend yield)

That’s the stock’s P/E divided by growth rate, plus dividend yield. Any stock with a score of less than 1 is worth looking into. Here is a stock screen that I ran for smaller stocks using this formula:

Stock                 Symbol          P/E         EPS Growth            Dividend Yield           Score
                                                             (Annual %)              (%)                          (<1 is good)

Knightsbridge      VLCCF           6.70         15.79                        17.60                       0.20
Tankers Ltd.

Tuesday              TUES           10.80         18.82                         5.10                       0.45  
Morning Corp.

Seaboard Corp.     SEB            7.10          96.92                         0.20                       0.07

You can see from the above results how a combination of low P/E and high dividend yields bring down the score. If you wanted to magnify the profits from these stocks, just reinvest the dividends back into buying more of the stock.

Regards,

Sala Kannan
May 26, 2006
P.S: I’m on a hunt for stocks with great valuations from all over the world. My quest has already taken me to Africa and Mexico. Now, I’m headed to Indonesia in just 2 days time. In next week’s Sleuth, I’ll write to you from Indonesia with my notes, observations and lots of photos!

Exposed: Warren Buffett’s Entire Portfolio and How You Can Replicate It was originally featured in the Penny Sleuth.