Thursday, 2 July 2009

Investing Ideas from Warren Buffett and Stock Market Superstars

Renowned investor and second richest man in the world Warren Buffett made a huge purchase of shares in investment banker Goldman Sachs at the very time last September when the world's financial system was on the brink of collapse. For a few months, it looked like a bad deal as GS continued to fall by half again to a bottom in November (see Google Finance chart for GS image below). The steady march upwards since then means that Buffett has made a 30% paper profit on the warrants alone.

A retail investor who had tagged along on Buffett's coat-tail and bought common shares at $133 on September 24th, the day his purchase was announced, would be up 12% as of June 5, 2009, when the price closed at $149.47. Add in the depreciation (see Bank of Canada's exchange rate converter) of the Canadian dollar (CAD) versus the the US dollar (USD) and the profit for a Canadian goes up to 19%.

Lessons from this example:
  • picking winners is possible but not easy - there is a reason Buffett is so rich; though not infallible (and he admits to his mistakes, which many of us refuse to do - "it wasn't me, it was the market" - and thus fail to learn) his judgement and knowledge are more often right than wrong
  • it takes courage, daring and risk to make a lot of money - few would dispute that the world financial system could have collapsed, taking GS and Buffett with it, yet he bet big - $5 billion is a lot even for Buffett (maybe 15% of his net worth). But should individual investors commit big like him? It is necessary to ask oneself whether one knows enough - a fool with courage is still a fool.
  • patience and nerves are required too - imagine sitting there November 20th when the price had fallen to $52. The tough question at that moment - would it continue to go down or would it be time to sell as so many investors do out of resignation or disgust. It is interesting to note that today, despite being ahead by a healthy margin, Buffett is still not selling, unlike so many investors limit their gains by selling winners too soon. (I think he wants to reclaim richest man spot from Bill Gates of Microsoft)
  • foreign currency swings can enhance returns, as in this case, or they can reduce them. As the financial and economic crisis seems to be abating, the Canadian dollar has been climbing against the USD, reducing the net gain on a GS investment.
  • it's worth watching the moves of such savvy investors for ideas. The investments of a whole raft of US investors can be found on GuruFocus. There are highly successful Canadian investors too - people like Stephen Jarislowsky and Eric Sprott who seem all too willing to impart their opinion on the state of financial and economic affairs. Canadian Business magazine recently published a Top Ten Canadian Investors list.
Given that Jarislowsky is number 601 on the Forbes list of richest people in the world for 2009, with a few good ideas from him and other investing superstars maybe we can all move up a few notches too.

Note that any commentary here is just that - commentary - and not an investment recommendation.

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