Dear Investor,
I won't say you can't find this secret anywhere else. Maybe it's there in books like You Can Be a Stock Market Genius or How to Make $1,000,000 in the Stock Market Automatically. Maybe Robert Kiyosaki writes about it in Rich Dad, Poor Dad. Maybe not.
I wouldn't know — I'm not going to read those books. I don't need to, because I already know the most important secret. And I'm more than happy to give it all away.
Here's what I saw
Expressed in easy-to-read black and white on a page or two of numbers was an astonishing demonstration of long-term investment success. Almost position by position, stocks that were trading for $30, $40, $50 a share on that day had been held for years and years, invested at cost bases of $1.57, $2.34, $0.88.
What I saw that day is what every young investor should see: Finding good companies and holding those positions tenaciously over time can yield multiples upon multiples of your original investment.That's what great investors do …
*Warren Buffett has done it with classic American brands Coca-Cola and American Express.
*Philip Fisher did it with Motorola and Texas Instruments.
*Shelby Davis did it with American International Group.
The act of doing it is part of what made them great investors. And after finding good companies, boy, do you ever work a lot less than people making dozens of trades a week, following fast-talking TV gurus or somebody's overpriced charting software.
Is the greatest secret of all even a secret?
Maybe not, but judging by the short-term mind-set of many investors — individual and institutional alike — it may as well be.
So scribble this down and put it on your fridge door:
Find good companies and hold those positions tenaciously over time to yield multiples upon multiples of your original investment.
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Sunday
Buffett Beats Bernanke
Fed Chairman Ben Bernanke is in a rough spot these days. When he lowers interest rates, the specter of stagflation is raised. When he rescues Bear Stearns (BSC) from potential bankruptcy by brokering a sale to JPMorgan Chase (NYSE: JPM), he's chided for guaranteeing billions in private subprime loans with public money.
Of course, if he did nothing, I'm sure he'd be blasted for turning a blind eye as the nation spirals into recession.
Bernanke's problem is that he's tasked with fixing long-term problems with a short-term tool kit. We folks on Main Street leveraged ourselves into homes we couldn't afford while the folks on Wall Street gladly financed us. Greed and irrational exuberance drove both sides for the better part of this decade. Now that the bubble has burst, Bernanke is forced to try to minimize the damage.
Unfortunately for Ben, no one person, even with the strength of the government behind him, has the power to elicit anything more than a temporary shrug from the U.S. economy.
Enter BuffettWell, there's one more thing we can do: We can learn from Warren Buffett and his stewardship of Berkshire Hathaway (NYSE: BRK-A). Buffett had already learned from the mistakes of others to avoid bubbles in the first place. He was fearful when others were greedy. We should follow his lead.
Back during the Internet bubble, despite charges that he was a dinosaur who couldn't adapt his investing strategy to a new paradigm, Buffett refused to buy into the new economy stocks the rest of us poured money into. He had surely followed the stories of Yahoo! (Nasdaq: YHOO) and Cisco Systems (Nasdaq: CSCO), but, then as now, he refused to buy into companies he couldn't understand or value thoroughly.
To be clear, there's a difference between understanding Yahoo!'s business model and being able to predict the emergence and future dominance of a competitor like Google. Buffett saw hard-to-assess businesses selling for astronomical multiples. He passed. Now, eight years later, both Yahoo! and Cisco trade at less than a third of what they did at the height of the Internet bubble.
Time to feastBuffett wasn't fooled by the housing bubble, either. Berkshire was largely unscathed by the housing fallout and is trading about 20% higher than it was a year ago. In fact, in this volatile market that has other investors defecting, Buffett is on the prowl. He offered to reinsure -- on very favorable terms -- the municipal bond debt of subprime-stung insurers including Ambac (NYSE: ABK) and MBIA (NYSE: MBI). They didn't accept his offer, but he was being greedy when others were fearful.
No matter. I have a feeling Buffett will soon find a way to deploy at least some of the more than $40 billion of cash on Berkshire's balance sheet. After all, he's been avoiding bubbles and saving up for just such a buying opportunity.
Greed is good ... sometimes
We Foolish investors need to be more Buffett than Bernanke by:
Taking the long-term view and not grasping at short-term solutions
Avoiding companies that are simply a ticker and a story
Finding great companies that have attractive stock prices
Investing steadily in good times and bad.
Of course, if he did nothing, I'm sure he'd be blasted for turning a blind eye as the nation spirals into recession.
Bernanke's problem is that he's tasked with fixing long-term problems with a short-term tool kit. We folks on Main Street leveraged ourselves into homes we couldn't afford while the folks on Wall Street gladly financed us. Greed and irrational exuberance drove both sides for the better part of this decade. Now that the bubble has burst, Bernanke is forced to try to minimize the damage.
Unfortunately for Ben, no one person, even with the strength of the government behind him, has the power to elicit anything more than a temporary shrug from the U.S. economy.
Enter BuffettWell, there's one more thing we can do: We can learn from Warren Buffett and his stewardship of Berkshire Hathaway (NYSE: BRK-A). Buffett had already learned from the mistakes of others to avoid bubbles in the first place. He was fearful when others were greedy. We should follow his lead.
Back during the Internet bubble, despite charges that he was a dinosaur who couldn't adapt his investing strategy to a new paradigm, Buffett refused to buy into the new economy stocks the rest of us poured money into. He had surely followed the stories of Yahoo! (Nasdaq: YHOO) and Cisco Systems (Nasdaq: CSCO), but, then as now, he refused to buy into companies he couldn't understand or value thoroughly.
To be clear, there's a difference between understanding Yahoo!'s business model and being able to predict the emergence and future dominance of a competitor like Google. Buffett saw hard-to-assess businesses selling for astronomical multiples. He passed. Now, eight years later, both Yahoo! and Cisco trade at less than a third of what they did at the height of the Internet bubble.
Time to feastBuffett wasn't fooled by the housing bubble, either. Berkshire was largely unscathed by the housing fallout and is trading about 20% higher than it was a year ago. In fact, in this volatile market that has other investors defecting, Buffett is on the prowl. He offered to reinsure -- on very favorable terms -- the municipal bond debt of subprime-stung insurers including Ambac (NYSE: ABK) and MBIA (NYSE: MBI). They didn't accept his offer, but he was being greedy when others were fearful.
No matter. I have a feeling Buffett will soon find a way to deploy at least some of the more than $40 billion of cash on Berkshire's balance sheet. After all, he's been avoiding bubbles and saving up for just such a buying opportunity.
Greed is good ... sometimes
We Foolish investors need to be more Buffett than Bernanke by:
Taking the long-term view and not grasping at short-term solutions
Avoiding companies that are simply a ticker and a story
Finding great companies that have attractive stock prices
Investing steadily in good times and bad.
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