Investing 201
BOND – On bond investing
We don’t get paid for activity, just for being right. As to how long we will wait, we’ll wait indefinitely. - Warren Buffett (116) Buy long term individual bonds yourself when rate is high, not when rate is low (117) Opportunity of higher bond return can be achieved by institutional trading based on yield curve (118) No one can predict future rate changes, so use a bond ladder strategy if you want to reduce rate risks (119) Default risk of bonds can only be minimized by diversification |
MUNI – On tax-free investing
Risk can be greatly reduced by concentrating on only a few holdings. - Warren Buffett (120) Markup of dealers can be much higher than commissions for municipal bonds (121) Unconditional tax levy and revenue can make municipal bonds very safe (122) Net after-tax return makes municipal bonds an attractive investment (123) Interest rates of high quality municipal bonds vs. treasury bills are good valuation measures for municipal bond pricing |
FUNDS – On mutual fund investment
In a commodity business, it’s very hard to be smarter than your dumbest competitor. - Warren Buffett (124) Flow of the investors’ money could significantly affect the performance of a large size mutual fund and thus increase potential risks (125) Understand the risk of a mutual fund is not necessarily lower than stocks (126) Net expense ratio of a mutual fund is only part of the total fees (127) Diversification may not be accomplished by merely selecting a few mutual funds (128) Select funds by the consistency of their strategies and lower fees, not by their sizes and past performances |
GOLD – On gold investment
I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for ten years. - Warren Buffett (129) Gold is a hedging vehicle against inflation, crisis, and dollar depreciation (130) Owning physical gold is not necessary better than owning gold ETFs (131) Long-term return of gold is appreciation only without interest income (132) Dollar exchange rate affects short-term gold price volatility |
REIT – On real estate investment
Buy something that you’d be perfectly happy to hold if the market shut down for 10 years. - Warren Buffett (133) Real estate has low correlation to stock market movement (134) Equity in a good Real Estate Investment Trust (REIT) often yields better long-term return than owning properties directly (135) Interest risk of investing in income properties must be understood (136) Time of managing properties is an important factor to decide owning properties directly vs. investing in REIT |
OPTION – On investing using options
You do things when the opportunities come along. - Warren Buffett (137) Options are not necessarily speculative or high risks, it can reduce risks too (138) Put option holding is equivalent to buying insurance (139) Time decay is the biggest advantage to option sellers and disadvantage to option holders (140) Income strategies through selling covered-call and/or selling cash-secured put are two conservative option strategies (141) Overvaluation of long term options can create better income opportunities (142) Near term options can be replaced by longer term options to avoid trade of underlying securities |
CURRENCY – On investing in currency
A weak currency is the sign of a weak economy, and a weak economy leads to a weak nation. - Ross Perot (143) Currency war has significant impact on global economy and thus investment choices (144) U.S. dollar affects material prices that are fundamental to investment returns (145) Risk of currency exchange rate is inherent to any company exporting goods globally (146) Return of international investments can be positively or negatively changed by currency changes (147) Exchanging to an appreciating currency may not be a good investment strategy due to unpredictable political risks (148) Net return of trading currency is always reduced by price spread and fees, and possibly interest rate adjustment (149) Currency hedged investment can reduce currency risks with increased hedging cost (150) Yield attractiveness and positive currency trend combined can create opportunity for international bond investment |
PRICELINE – On growth stock selection
Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well. - Warren Buffett (151) Price (technically improving) (152) Revenue (low price/sales ratio) (153) Insider (insider buying activities) (154) Cash (cash position and good balance sheet) (155) Earning (earning trend or loss improvement) (156) Liquidity (good volume) (157) Interest (institutional interest increasing) (158) New Technology (leader in its market) (159) Event (special situation) |
PRIDE – On dividend stock selection
Buy companies with strong histories of profitability and with a dominant business franchise. - Warren Buffett (160) Price (Price increase) (161) Revenue (Revenue increase) (162) Insider (Insider buying increase) (163) Dividend (Dividend increase) (164) Earning (earning increase) |
EARNING – On company earning per share
Everyone has the idea of owning good companies. The problem is that they have high prices in relations to assets and earnings, and that takes all of the fun out of the game. - Charlie Munger (165) Earnings before interest, taxes, depreciation, and amortization (EBITDA) measures a company’s financial performance. (166) After earning release, stock price movement is driven by outlook (167) Ratio of price to earning alone is not a good indicator for a growth company (168) No earning does not mean a bad investment for an early stage fast-growing company (169) Investor expectation of future earnings determines the stock price movement (170) No growth of earnings indicates a company is maturing (171) Growth of revenue is a more important measure than earnings for growth investment |
CASH – On cash investment
Cash never makes us happy. - Warren Buffett (172) Cash is not always king – crisis vs. income opportunities (cost of waiting) (173) Accessibility is the reason to sit in cash – if you need cash soon, do not invest (174) Safety check is important for cash – FDIC insurance terms and Money Market Fund holdings (175) Hold cash until you know what to invest – do not invest when you do not know |
ANNUITY – On annuity investment
Our favorite holding period is forever. - Warren Buffett (176) Assess the needs for liquidity before ever thinking about annuity (177) Net investment return of an annuity is always lower than not using annuity due to insurance cost (178) Not buying an annuity if you do not understand the lifetime guaranteed benefit can never be all cashed out sooner (179) Universal life (UL) policies could be simpler and better alternatives than annuities (180) Investment choices in an annuity determine the long-term value of the policy (181) Time commitment of lifetime is necessary after selecting an annuity (182) Year when buying annuity is a major decision factor |
IPO – On investing in IPO
If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes. - Warren Buffett (183) Initial offering price is not necessarily more attractive than secondary market prices (after IPO) for stocks, bonds, and Closed End Funds (CEFs) (184) Pre-IPO price is the emotional outcome of roadshows from Wall Street (185) Opportunity of investing in IPO is associated with speculation |
TIP – On investment tips
We have long felt that the only value of stock forecasters is to make fortune-tellers look good. - Warren Buffett (186) Timing services from newsletters are not reliable – not to chasing hot topics (187) Insider tips are illegal and bad trades too (188) Professional upgrade/downgrade is often late and is not always useful |
ETF – On investing in ETFs and indexes
By periodically investing in an index fund, the know-nothing investors can actually outperform most investment professionals. - Warren Buffett (189) Exchange Traded Funds (ETFs) are increasing popular investment vehicles but investing in one ETF only does not reduce portfolio risks (190) Tracking error and transaction fees are drawbacks of index ETFs as compared to index funds (191) Fund differences – understand passive vs. active; and ETFs vs. Mutual Funds vs. CEFs |
TIMING – On investment timing
The Stock Market is designed to transfer money from the Active to the Patient. - Warren Buffett (192) Timing is difficult – being right 70% of time, not merely 30% (193) Increase time of investing, not timing of investment (194) Manage downside risks with designing of strategies, not timing (195) Index funds help eliminate bad timing, but not bad allocation (196) Not timing is better than timing unless you buy when fearful and sell when greedy (197) Gradual investing is good only when you follow the discipline, not on feeling |
TRADE – On trading of investments
The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch. - Warren Buffett (198) Tax is very important but it is the secondary factor of deciding when to trade (199) Risk of emotion is the worst enemy of traders (200) Assess your maximum loss (not gain) before every trade (201) Diversification of your trades by time and selections, but not over-diversify (202) Exit trade is more difficult than entry, avoid “one reason to buy and multiple reasons not to sell” syndrome |
MARGIN – On margin trading
We will reject interesting opportunities rather than over-leverage our balance sheet. - Warren Buffett (203) Margin feature of an investment account does not mean you need to borrow money. It allows you sell and buy on the same day. (204) Asset used for collateral can have different requirements which could increase margin call risks. (205) Risk of margin trading is total loss from leverage (206) Growth of investment must be greater than margin interest to have positive return (207) Interest for margin increases cost of investing (208) New investors should be very careful when using margin features |
LOAN – On investment related loan
It’s not debt per say that overwhelms an individual corporation or country. Rather it is a continuous increase in debt in relation to income that causes trouble. - Warren Buffett (209) Liability planning is very important and directly related to investment (210) Opportunity of leverage always increase potential gains and risks at the same time (211) Asset pledged line can be good alternatives to traditional real estate loans (212) Net return rate should be compared without considering loans |
TAXES – On investment tax planning
The hardest thing in the world to understand is the income tax. - Albert Einstein (213) Tax equivalent return is what matters in any investment strategies (214) Avoid taxable income by maximizing deductions (215) eXchanging like-kind investment can reduce taxes (216) Estate tax planning can make tax-efficient and orderly transfer of assets (217) Saving for retirement generates tax-deferred or tax-free long-term growth |
IRA – On investing for retirement
Someone’s sitting in the shade today because someone planted a tree a long time ago. - Warren Buffett (218) Investing for retirement is for long term; timing, being overly conservative, and paying higher fees are three costly mistakes (219) Rollover from an employer's plan to IRA after job change or retirement is normally a good choice over long-term (220) Annuity for retirement may not be as good as what being told by your financial advisors |
ROTH – On Roth IRA investment
Always invest for the long term. - Warren Buffett (221) Roth conversion only benefits to someone with careful tax planning (222) Open Roth IRA as early as possible (223) Time commitment in Roth account assures the success of your investment (224) Higher return in Roth account is tax free but speculation should be avoided |
DCA – On investing using dollar cost averaging
Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices. - Warren Buffett (225) Dollar cost averaging (DCA) is for periodic investing; not for lump-sum (cost of waiting) (226) Cost average of DCA is always lower than average market price. (227) Averaging strategy only works for good investment with higher ending price. |