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Sunday, May 2, 2010

Investing Strategies (3)

The annual meeting of the shareholders of Berkshire Hathaway took place yesterday in Omaha, Nebraska. Presiding over the festivities, sometimes referred to as Woodstock for Capitalists - although lacking the hallucinogenic, and other mind altering, recreational substances that were abundantly available at the original, was Chairman Warren Buffet.

Worthy of note is that fact that the Berkshire has never lost money in the latest technological fad, whether it be computer hardware or software, dot coms, alternative energy, bio-technology and the like.

Nor has the company ever made money in those sectors. Since Mr. Buffet does not understand the technologies, and since it is nearly impossible to determine how, if, or when, the companies involved will make money, he declines to invest.

For an historical insight, consider automobiles - the hot new technology of 1900. By the 1920s, there were still many companies making automobiles in the USA. Vicious competition and economies of scale, however, ensured that only a few prospered. Most are now long gone: American Motors, Packard, Hupmobile, Studebaker to name only a few. Wikipedia's very comprehensive list of defunct automobile manufacturers is an eye opener.

Between 1850 and 1875, railroads - another hot new technology that changed the world - went bankrupt almost every month.

Whatever the latest and greatest 'change (or save) the world technology' may be, things are not going to be different this time. Except for those, such as venture capital funds, with the ability to make many early investments in a given technology, the risks far exceed the likely rewards.

For individual investors (disclosure: your corespondent owns a modest stake in Berkshire Hathaway), these principles, derived from studying Mr. Buffet's record, may be of value:
  • Only invest in businesses that you understand.
  • Never overpay: 'buy high, sell higher' is for gamblers, not investors, and the odds are against you.
  • Have enough cash on hand to avoid leverage while still being able to take advantage of opportunities.
  • Complicated investments are associated with high - sometimes really high - fees and expenses. As a result, sellers may well have their, not your, best interests at heart.
A starting point, from which a competent investor may realize decent returns without taking on excessive risk, is 'keep it simple, stupid'.

Enough said!

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