Tuesday, December 2, 2008

What You Should Learn from Your First Investment (based on Warren Buffett's actions)

The late American professor Randy Pausch talked about parents sending their children to learn sports in his book, The Last Lecture. Pausch says that most parents rarely send their children to learn sports such as football, swimming or soccer in order to learn about the intricacies of the sport. Instead, he believes that parents want their children to learn far more important lessons such as teamwork, perseverance, sportsmanship, the value of hard work, and an ability to deal with adversity.

All these are indirectly taught when a child learns to push harder they feels like quitting. The best thing, says Pausch, is that children don’t
realise that they are learning these lessons until well into the process. Really good coaches are those that can make the children learn something that they intend to teach.

Indirect lessons are also there with in the sport of investing. The investing newbie, of any age, represents the child in this arena. Smart parents and smart newbies will pick the right coach to inspire, not just the selection of what to buy, but also their attitudes and approach to buying and selling their assets.

If your personal investing coach is Warren
Buffett, the lessons are clearly seen in everything he says and does. Buffett walks the talk. For example, Buffett expounds the benefits of value investing and because of this conviction; Berkshire Hathaway was holding US$31 billion in cash back in 2003 when he was not able to find attractive stocks or bonds to buy.

Lately, Buffett has been shopping. He acquired a US$5 billion stake in Goldman Sachs Group Inc and US$3 billion in General Electric Co during the current economic turmoil. This lesson of value investing, practiced and preached, by the world-famous investor inspires everyone, new or seasoned, in the often brutal world of investing.

Buffett’s indirect lessons are just as beneficial and perhaps, more inspiring. Most of these, found in interviews and in his annual letter to shareholders of Berkshire Hathaway, set the right context for investments and can be extended to the way we choose to live.

Live Life as Simple As You Are

One indirect lesson that has proven to be true in the current economic turmoil is about living within your needs or as Buffett puts it “live life as simple as you are”. He still lives in the 3-bedroom house in Omaha that he bought 50 years ago (Buffett has other properties and his choice to live in this one despite his wealth says something). Many that have met Warren Buffett personally say that they are more impressed with his humanity than his stock wizardry. If this indirect lesson had been widely taught and learnt, the
subprime mortgage crisis is unlikely to be as severe as it is.

Invest for Reasons That Are Bigger Than the Glitter of Wealth

Buffett’s action also speaks volumes about the underlying objective of making profit by investing. In 2006, he gave away more than 85% of his fortune to five charitable foundations with the bulk going to the Bill and Melinda Gates Foundation, which is driven to finding cures for diseases that plague impoverished nations. This donation was the single largest charitable gift in the US history of philanthropy. Buffett’s indirect lesson is not just about giving back to society. Here, he shows that it is possible, even advantageous, to become extremely rich without focusing solely on the glitter of wealth.

Throughout the years, Buffett has managed to avoid the temptation of buying companies to make a quick buck. During the dot-com bubble, Buffett avoided investing in technology companies, saying that he did not understand their business model. The results are obvious. Buffett was right and those that doubted his sanity or logic lost their money.

Buy to Hold Forever

Another indirect lesson that should be learnt by all, especially those making their first investment is about holding for the long-term. Buffett’s holding period is said to be “forever”. The Coca-Cola Co is an example of a key holding of Berkshire Hathaway, one that he may well hold ‘forever’. Here, holding forever means buying a company and its prospects that you believe in. This is holding when the stock falls (perhaps even buying more) without a change to its fundamentals or the reasons that compelled the purchase in the first place. A falling investment due to external circumstance does not make it a bad buy. With this view, newcomers and seasoned investors can reduce their emotional distress when markets fall.

Granted, it is easier to learn indirect lessons with experiences such as in organised sports. These three are just here to prodded investors to think a little harder about the reasons why they want to invest and in the way they chose to live life.

source : http://www.fundsupermart.com.my/main/research/viewHTML.tpl?articleNo=139

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