Betting on Global Stock Markets

Over the past few days, there have been several stories written about Warren Buffett’s $14 billion bet on global stock markets. I believe these stories are all in reference to this excerpt form Berkshire Hathaway’s annual report:

“Berkshire is also subject to equity price risk with respect to certain long duration equity index put contracts. Berkshire’s maximum exposure with respect to such contracts is approximately $14 billion at December 31, 2005. These contracts generally expire 15 to 20 years from inception. Outstanding contracts at December 31, 2005, have been written on four major equity indexes including three foreign. Berkshire’s potential exposure with respect to these contracts is directly correlated to the movement of the underlying stock index between contract inception date and expiration. Thus, if the overall value at December 31, 2005 of the underlying indices decline 30%, Berkshire would incur a pre-tax loss of approximately $900 million.”

It’s impossible to evaluate what exactly this means for Berkshire or what it tells us about Buffett’s thinking without knowing more details. But, there are a few things I’d suggest you consider when reading the news reports.

First, the $14 billion headline number makes this bet look larger than it really is. According to the above disclosure, a 30% decline in the underlying indices would only create a $900 million pre-tax loss. One article stated that a decline in the indexes to zero was highly unlikely given historical trends. It’s a lot more than highly unlikely. But, since we don’t know the details of Berkshire’s exposure, we can’t evaluate the real risk of a very large loss.

A lot of these news stories have called Berkshire’s “long duration equity index put contracts” a bet on global stock markets. A few individuals have been quoted as saying Buffett has become bullish long-term. Buffett’s always been optimistic about the very long-term insofar as he recognizes how better things are today than they have been at any other time in history, and how that is likely to remain true for some time. Despite Buffett’s concerns about nuclear war, he doesn’t see a return to the Dark Ages and those kinds of anemic returns on capital.

That’s important to keep in mind, because I’m not sure this bet is much more than that. If you assume returns on equity will be similar to those achieved in the years since industrialization began, and you assume central governments will continue to cause inflation, a long duration equity index put contract isn’t much of a stretch.

Equity will earn returns, much of those returns will be retained by the businesses, and inflation will increase (nominal) stock prices regardless of whether the underlying businesses’ assets are increasing or remaining stable.

So, I’m not sure this is a bullish sign. In fact, it may be a bearish sign, because it suggests Buffett can’t find individual equities to buy, three of the four indexes are foreign, and someone wants to be protected against very large losses in a diversified group of holdings.

Remember, someone is paying for this protection. In my opinion, it’s not the kind of protection investors need. It’s long-term protection on an index. I suppose I can see why a pension fund might want this (to increase exposure to equities), but it seems like exactly the sort of thing an insurance company can make money selling. There’s fear of a very large loss, and a lot of factors that are hard to see that will tend to make that loss pretty unlikely.

We don’t know what premiums Berkshire is receiving, so we really can’t evaluate these contracts. If someone writes hurricane insurance it doesn’t mean they think hurricanes are unlikely, it just means they think someone is dumb enough to pay more than the protection is worth. Knowing the odds of a decline in global stock markets isn’t enough to evaluate Berkshire’s contracts, because we don’t know the price.

I’m not enamored with current valuations in the U.S., but looking out a couple decades it’s not all doom and gloom. Markets tend to overshoot in both directions, but there’s usually someone sane enough to buy when stocks get cheap enough.

What’s remarkable about the way investors move stock prices isn’t the magnitude of the truly major moves (up or down); it’s the frequency of meaningful moves when there’s no meaningful changes in underlying values. Think about the price range of an average stock in an average year – that’s the really irrational part of investor behavior. I wouldn’t want to have anything to do with a one-year contract on a single stock. That’s a very different situation.

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How Can you Make Heaps of Money From the Stock Market While Keeping Risks to the Minimum?

How can you make heaps of money from the stock market while keeping risks to the minimum?

I always believe that you should never put your money in something you do not know about eventhough everyone is dumping their money in this particular stock and prices are rushing like mad.. That would be speculating or gambling. Sounds weird. Remember the internet bubble where a lot of investors buy internet stocks like crazy just because they had been going up and up.

Warren Buffett would never gamble or speculate. He would not invest in something unless he is sure or certain of what he is investing in. The common theory is that higher risks = higher returns. However you can turn the situation to your advantage by doing research on the companies you are investing in, like warren buffett and yet make higher returns.

Warren Buffett once said ‘Rule number 1, never lose money’. This is the main concept for value investing. He also said that I would rather be certain of a good result than hopeful of a great one. Wise words for value investors indeed.

So what are Warren Buffett’s secrets? Below are some of his criterias

1. Identify companies with high and growing ROE

2. Identify companies with 15% growth or more in earnings

3. Identify companies with high profit margins

4. Identify companies with book value growing regularly

5. Identify companies with debt/equity ratio of 50% or lower

6. Identify companies with high intrinsic value

The criterias I have identified above can be easily identified nowadays on popular sites like moneycentral.msn.com or other popular investment software. The most important criteria of value investing is margin of safety… So how do you guarantee a margin of safety?

The secret is actually very simple. To invest in companies, sectors or industries that you are knowledgeable about. It is also known as your circle of competence. You will need to know about the relevant industries that affect the industries that these value companies are in. You will also need to know the safety, stability and tax rates of the country and which the company is in.

You should also have a well diversified portfolio, selecting stocks in industries which you specialised in.

It all boils down to the 2 simple rules of investing.

1. Never lose money

2. Do your research/homework before you invest

Check out more articles and tips at http://bewarrenbuffett.com

Check out more articles and tips at http://bewarrenbuffett.com

Investment, How to invest, investment for dummies, investment guide, stock brokers

Read the following books for learning how to invest. Even if you are a middle level investor, its good to read these books, it will help you sharpen your skills as an investor.

1.) The Intelligent Investor

Author: Benjamin Graham

Synopsis: Founder of the science of stock analysis, Graham provides readers with the basics of “value investing.” Warren Buffett, noted investor and one of Graham’s former students provides the introduction.

This book clearly explains two completely different investing styles in great detail. One for every day people who don’t want to think about their portfolios and the other for people who wants to enjoy maximum returns. There is a basic difference between these two kinds of people. Bottom line is more research you do, the better results you are going to get.

2.) One Up on Wall Street

Author : Peter Lynch, Former manager of Fidelity’s Magellan Fund (FMAGX)

Lynch is well known for his commonsense approach to investing. The key according to him is to focus on what you know. Instead of investing in the latest Wall Street fad, look around you. Is there a new restaurant chain that’s doing well? Is there a company building a new plant or warehouse in your area? Such information can help you beat market returns over and over.

3.) Security Analysis: The Classic 1934 Edition

Author: Benjamin Graham

This analysis connotes the careful study of available facts with the attempt to draw conclusions therefrom based on established principles and sound logic… Sometimes they are correct sometimes they are wrong…

4.) The Little Book of Common Sense Investing:

Author: John C. Bogle

It is a good way to ensure your Fair Share of Stock Market Returns

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CompareBroker.com aims at helping Traders (Stocks, Equities, Options, IRA, Mutual Funds) to make smart investing decision in stock market. We partner with different online stock brokers and bring out their value proposition to consumers for a fair comparison.

3 Tips From Stock Investing Legends – How to Pick Winning Companies

How do successful investors (not traders) view the investing universe? Are there any trends in the way they pick their investments? Here are some insights distilled from the methods and writings of investment legends like Warren Buffett, Philip Fisher, and Peter Lynch.

Stay within your circle of competence: You are best positioned to identify winning companies within your own field of expertise. If you work in retail, you are more qualified to decide if you should invest in companies like Walmart, Target, Best Buy, etc. than the latest bio-tech company.
Look for Economic Moats: There are some companies that manage to be virtual monopolies in their area. These companies have, over the years, succeeded in building a “moat” around them to keep their competitors away. They have a durable competitive advantage. Some examples of competitive advantage are: Brand – Think Harley Davidson, Coke, BMW. These are brand names etched in the public mind as the best in their class. These companies can raise their prices on the strength of their brands resulting in deeper profits. High Switching Costs – When was the last time you switched banks? Or cell phone providers? Or cigarette brands, if you are a smoker? You get the picture here? Companies that have high switching costs can hold on to their customers a lot longer than companies that don’t. Low Cost Producer – Companies that are able to make products and sell them at phenomenally lower prices than their competition automatically attract customers – lots of them. As long as quality is not compromised, of course. Walmart and and Dell have perfected this concept to a science. Secret – Large pharmaceutical companies with patents; companies that own copyrights, drilling rights, mining rights, etc. are pretty much the sole producer or service providers in their area. Again, these companies can raise prices without fear of losing customers, resulting in higher profits. Scalability – This is a product or service that has the potential to network or add more users with time. Adobe has become the defacto standard for publishing, Microsoft’s Excel for spreadsheets. eBay is a great example of a user network. Each additional user to the network costs the company virtually nothing. The additional revenues that come in as the network expands go straight to the bottom-line. Quality of Management: How competent is the management running the company? More importantly, how focused are they toward the company, customers, investors, and employees? In this age of rampant corporate greed, it’s always a great idea to research the management of the company. The companies annual reports as well as newspaper/magazine articles are good places to get this information.

To wrap up, stay within your field of expertise, seek companies with durable competitive advantages, and ensure management running the company is honest and investor-oriented. You can glean a lot of insight into investing by studying famous stock market investors.

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If you are a beginning investor, you can teach yourself to invest in individual stocks and learn to think independently by visiting him at independent-stock-investing.com

Investing Lessons From the Stock Market Guru Warren Buffet

If you are new to stock market then you definitely need to know about Warren Buffett. He is the best known stock market guru and his theory of the long term buy and hold has been legendary and well known. Well now no longer is he the guru of stock market but also owns and manages several companies within his portfolio via his holding company called Berkshire Hathaway.


The person Warren Buffet lives in a town called Omaha and has been investing now for over 40 years now. When he began the Berkshire Hathway firm in 1965 and if you invested $10,000 in it would have grown to 30 million dollars in year 2005. He has shown the world that it is possible to achieve sustained compound annual returns on the investment year over years. Of course based on the returns he has given his investing style has become very famous.


His investing style comes from the Benjamin Graham school of investing which says is all about value investing. Value investing means that you as an investor pick stock whose stock price does not adequately reflect the intrinsic worth of the stock. Coming to intrinsic value there is no formula defined to get to know the intrinsic worth. What that means is that you almost try to beat other investors in looking out for a value investing stock. As soon you get there, a few hundreds will also swarm in and the price will go up and that price will be true reflection of the intrinsic worth.


Since you have already honed in the stock you will gain the most from the upside. Now that is the short term outlook you have. Warren Buffet looks it like a long term strategy and he holds onto the stock that he bought when they were undervalued and he seeks to maintain that long term hold and he has since proved that holding long term without worrying about the stock market is your best bet. He had once said and I quote “In the short term the market is a popularity contest; in the long term it is a weighing machine”.


Well Warren buffet works on the value investing principle but definitely has devised his own way of working with that principle. For example he asks the question whether management is candid with shareholders. That criterion is one of the few tenets that he uses to analyze the companies. He himself has a letter to shareholders which is legendary and every year people wait to see get hold of the newsletter so that they get pieces of wisdom from this person.


So go ahead and read all about Warren Buffet apply your own intelligence to it and you will surely make money in the stock markets.

The author provides tips and advice on stock market for beginners and helps them learn the stock market for beginners lessons.

Berkshire Hathaway Brk.a : Maximize Your Profits From Warren Buffett Stock

Berkshire Hathaway BRK.A : Maximize Your Profits from Warren Buffett Stock
by Dr. Steven Lee (Ph.D)

What is the problem investors’ face when buy Warren Buffett’s stock Berkshire Hathaway?

Although Berkshire Hathaway (BRK.A) is one of the most expensive stocks in the stock market which cost investors US$100,000++ per unit, there are still some investors willing to purchase the stocks.

May be due to the share is “Value-To-Buy”, the investors always buying and hold the stock without selling.

But the secret is how to maximize the profits from Berkshire Hathaway by just change one simple thing …

Buy low sell high 3-5 times a year.

Stocks are not meant to be bought and held for 5-10 years nowadays. I know this is not the principle for Warren Buffett’s concept.

But to maximize the profits from Warren Buffett stock, you need to buy, hold then sell the stock for 3-5 times a year.

Sounds crazy? Below is the secret …

Find the Bottom Price

Why you need to find the bottom price of Berkshire Hathaway stock?

Three reasons:

1. Make your investment safe – Buy Berkshire Hathaway stock at the lowest price can prevent you from buy high and cannot sell higher.

That’s what happens to 95% investors, chase high but not manage to sell even the stock price drop.

And the drop for Berkshire Hathaway stock price is not play play lor, the price can drop nearly US$20,000 – US$30,000 each time. It’s a big amount too.

2. Maximize your profits – Buy Berkshire Hathaway stock at the lowest price, hold then sell it for higher profit by follow buy low sell high principle.

Instead of hold for 5-10 years, you only need to trade 3-5 times a year.

Less worries during market down, because you still enjoy your profits without holding a down trend stock.

Many investors just hold the stocks and look at it up and down without profits or dividends. I think you also believe this is not the right way to invest.

3. Minimize your risk – Bottom price is also a good cut loss point for investors to reduce their losses.

In the other hand, if we can make more than loss, that is consider a good investment.

Maximum Return – Minimum Loss = Good Investment

How to find the Bottom Price

Well, you may use sophisticated global investment software “INSIDERS” to help you find the bottom price. This is the ONLY online application software which helps you to identify the bottom price of Warren Buffett stocks.

Below is the “INSIDERS” chart for Berkshire Hathaway (BRK.A), the signals show that how you can trade 3-5 times a year for a good and stable company stocks like BRK.A and BRK.B as well.

Please click the link. http://www.fatnrich.com/images/brka.JPG

INSIDERS save your time from analyzing the bottom price of Berkshire Hathaway.

You don’t have to make analysis by viewing the reports and reading the news of Berkshire Hathaway stock.

Besides, it is simple and easy to use, even your kids can do it!

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Dr. Steven Lee (Ph.D) is the #1 best-selling author of “Create Wealth in Stock Market” and “The Magic Idea of Getting Rich”. Details at www.DrStevenLee.com or www.FatNRich.com

Dr. Steven Lee (Ph.D) is an investor, entrepreneur, and educator. He has spent the last few years writing books and conducting investment trainings. He is the creator of “Power System” and also the author of two books on how to invest in stock market. His first two books, Creating Wealth in Stock Market and The Magic Idea of Getting Rich, are two of the most practical investment books in the market place.