Investing Lessons

" Wide diversification is only required when investors do not understand what they are doing. " -- Warren Buffett

Sitting here on Saturday morning with my laptop and Fox News' business block on the television. I decided to make a post to my blog, specifically one sharing more with my readers about what I am learning about investing. I am a big fan of Warren Buffet ( the worlds greatest investor and the only person alive to have earned his entire wealth stictly from his own investment activity) and his style of investing. I just got done reading a book titled How to Pick Stocks Like Warren Buffet. It is a great read and I have probably learned more from that book than any other book on the subject of stock picking and stock valuation. Warren Buffet, has earned an annual return on his investments of about 29%. The 500 largest companies on the New York Stock Exchange often called the S&P 500 only returned about 11% during that same time period. For the life of me, I can't figure out why more people don't make this man's strategy a case study for their own investment style. Just like when I started my Coastal Vacations business, I found someone who was successful and have consistently followed their lead. I agree with Warren Buffett's style of investing because it logically makes sense and his track record speaks for itself.

Buffett's, style of investing is controversial in the mainstream of Wall Street investors. Which make no sense to me since most of the Wall Street investors don't even beat the index of the 500 largest companies on the New York Stock Exchange (S&P 500 Index). This statement can be proved by the fact that 75% of all actively managed mutual fund DON'T beat the S&P 500 index. That tells me that I will listen to Warren Buffett's advice, over the majority. Warren Buffett teaches:

- Don't Diversify, instead concentrate your entire portfolio on 15 to 20 stocks that you understand well. Conventional wisdom teaches that diversivication prevents possible losses in your portfolio. Warren Buffet, believes that diversification will dimish your gains as well. He believes that you prevent possible losses by understanding your investments. If you don't completely understand the businesses that you are investing in then don't invest in them regardless of what your broker says.

- Buy stocks you know at a great price. This goes against conventional wisdom about such tactics as Dollar Cost Averaging. If you don't think you can make an annual return on your investment dollar greater than long term treasury bonds, then you need to be investing in those bonds and not common stock.

Dollar Cost Averaging -- is a strategy where you buy a stock you feel will do well over the long run and you simply invest a set amount each and every month at the same time with the same dollar amount every month. The problem is that when the stock is over valued, as an investor investing in an over valued stock will decrease their annual returns on your money. Buffet believes when the stock is overvalued you would be better off finding a better value in the market or simply invest in long term Treasury Bonds.

- No one loses money when selling a stock for a profit. It's better to take your profits then risk taking a lose. Buy low sale high. These are all conventional wisdoms that Warren Buffet just does not practice. If he invests in a solid company with a solid track record and good management in place he will keep the stock indefinitely. If a stock price takes a dip but the previous factors remain in place for the company then Warren Buffett is not concerned about an immediate stock price dip. He knows that eventually the stock price will have to fall in step with the company's profitability.

Also Buffett does not believe in selling high only to re - enter a stock position when the price falls. There are several reasons for this. No one can time the market so theoretically it's impossible to buy at the bottom and sell at the peak. When selling a stock you have to realize the capital gains and therefore you are taxed on them. When being taxed you are unable to use that money to reinvest therefore when you do re-enter into your stock position you have to use after tax dollars. That one fact alone will diminish your portfolio returns. Not to mention by jumping in and out of a stock position you are also charged more in brokerage fees which also will add up fast depending on how often you are in and out of the market.

I am not a mathematician, but I am determined to learn how to understand financials of companies on the stock exchange and how to determine the best return on my investment dollar. I will share with you through this blog what I learn, my victories, and my set backs. It is not enough to own a great business such as Coastal Vacations, you must also know how to manage your increase in finances that come along with this business. By managing finances, I mean we should pay off all debt, save up a year's worth of finances in a money market account such as Paypal's, and start investing your money so that your money will began to work for you. Coastal Vacations will quickly lead you to financial security, but it will take your assets earning you an income while you sleep to lead to financial independence. Use income from your business to buy and own those assets. I will pass along what I learn about buying those assets as I continue to learn it.

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