Lessons on share investing by Warren Buffet's Former Daughter in law
Mary Buffet's investment strategy is value investment, where she intends to find undervalued companies to buy and hold. She also reinvests her dividends, to obtain a compounding effect.
In the interview, she mentions the following factors in trying to pick a good stock.
1. Price-earnings - It is quite common knowledge that a low price-earnings ratio is an indicator of a value buy. Even with my limited financial background, this is one of the first things I learnt about valuation as I began my job as a corporate lawyer. Mary Buffet mentions how she would not have bought coca cola at at price earnings ratio of 40, but bought it at a ratio below 12 due to the bad news effect when New Coke released.
2. Debt - A company with a high debt ratio naturally carries more risk, it shows that management is not handling the company properly. Mary Buffet stresses the importance of finding out why the company is borrowing money, and uses a gauge of avoiding companies with 5 times of debt over earnings.
3. Management - The article mentions how Mary Buffet would consider selling her stocks if a company's management has changed adversely. Personally, with limited business experience of my own, I find it hard to evaluate management on their CVs or their strategies. So this is something I should work on trying to learn to analyse.
4. Brand Name and Competitive Advantage - A good brand name is valuable as it means customers will go back to them, especially for consumer goods. A company with a strong brand name thus has greater value as a long term investment.
5. Knowing when to sell - Value investing is not just about holding onto the stocks indefinitely. Mary Buffet will also sell stocks if they are overpriced and then redeploy the money into another Company.
6. Being too cautious - This resonates with Warren Buffet's advice to embrace periods of fear, is not to be too cautious. Mary Buffet cites her own experience of being too cautious and selling her Apple shares and then failing to buy it again when it was cheap as she thought the price will fall further.
7. Patience - Patience to wait for the right price is key. This is important in the current market, where market sentiments are good and most stocks seem to be on the rise. Sadly for me, I was hoping to building up my stock portfolio this year and hopefully earn some dividends for reinvestment. The temptation to buy at the current prices does exist, and I have to constantly remind myself that there is equal importance in building up my war chest for the times when prices are good. It has been useful that some of the personal finance blogs I read do stress the importance of having a war chest.
The full article is available at:
http://www.straitstimes.com/business/invest/wait-for-share-prices-to-be-right-then-buy-and-hold?xtor=CS3-17
The Straits Times ran an interesting interview with Mary Buffet last Sunday, which included her insights on stock investing. Since she had the opportunity to learn firsthand from the legendary investor himself, her advice is definitely valuable.