My annual richest 400 rant

Well, once again, none of the so called get rich quick gurus nor internet gurus. But some internet
people are back on the list.

Proving, once again, that the doers out perform the gurus and dreamers. Well, duh!

There's an old saying something to the effect, that if you do what the wealthy DO, you'll be wealthy.

I, for one am studying Buffett's investment strategies to figure out why his strategies work
and my broker sucks.

Later.

Hi Joe,

I consider myself a student of Warren Buffett (#2 on the Forbes 400 list) as well. His investment approach does work, in the long term.

When you study him, though, keep in mind that in his earlier days, he also made profits by investing other people's money. He'd hold parties at his house, and invite around doctors, lawyers, and other rich people. They'd invest their money with him (through limited partnerships he set up).

He would invest the money in stocks, and then he would take 25% of the profits he made for them above the 6% the investors could have made by putting their money in a savings account. You can read all the details of how he did this in "Buffettology" by Mary Buffett and David Clark, Chapter 45, "How Warren Got Started: The Investment Vehicle".

You don't get the full picture of how Buffett made his wealth unless you also learn about this part of his life.

I've also studied to some degree Kirk Kerkorian (currently #33 on the Forbes list). He's the closest high-flier I've been able to find who got his start essentially by trading second-hand property! Though, he was at the right place at the right time.

As a teenager, Kirk Kerkorian used to buy and sell second-hand cars. He worked at a second-hand car dealership, and was able to buy some of these second-hand cars cheaply from his workplace. He'd take them home, fix 'em up, then resell them for a profit.

Soon after, Kerkorian trained to be a pilot. In WWII, Kerkorian was a civilian pilot for the British air force. He flew planes from Canada to the UK (so he didn't actually see any combat).

After WWII, you could get planes from the US Air Force quite cheaply, and Kerkorian bought many of these to resell, and also used some of these planes for his own charter plane service. In many ways, it wasn't too different from what he used to do with cars, but now he was dealing with planes!

Nowadays, he's probably most famous for owning MGM, and for having been one of the major owners in Chrysler before it got taken over by Daimler-Benz. (He has a current court case related to the takeover against Daimler-Chrysler - the company that emerged after Daimler-Benz took over Chrysler.)

For the direct-response marketers among us, the world's richest direct-response marketer is on the list too. That's Michael Dell (#10 on the list), the founder of Dell computers.

The story is that he started by putting together computers and selling them out of his dorm room while he was still a university student! Small starts can lead to great things, when you're at the beginning of a big trend (as he was).

And, of course, we then come to my personal favorite. He's not on the Forbes list - but he shares a lot of interesting lessons. That's Gordon Gekko - from the movie Wall Street!

"I don't throw darts at a board. I bet on sure things. Read Sun-tzu, The Art of War. Every battle is won before it is ever fought." - Gordon Gekko

This is the way those who really make money do it. While insider trading (which was in the movie Wall Street) is illegal, you have to learn how to legally "bet on sure things". Or at least, bet on things where the odds are in your favor.

That's all Warren Buffett does. That's what Kirk Kerkorian does. You could even say that any kind of direct response marketing is simply betting on sure things, once you've gone past the testing stage. This is the key to it all.

The wealthy don't really gamble their fortunes, but they do take calculated risks. If you're not ready to take any risks, you're not ready to get rich. But they have to be calculated risks - so the odds are in your favor.

When you take calculated risks, you won't win every time. But you'll win on average - and that's all you need to win in the long run.

- Dien Rice


The Forbes 400: The Richest People In America

But one of my all time favourite gurus is Don Lancaster. If any of you spent your youth sniffing solder and letting the smoke out of IC's, you may know the name. Don was a pioneer hardware hacker and has just published some reminiscences about his early days. You can read it here:
http://www.tinaja.com/glib/waywere.pdf

Its a great read, but heres a bit that really struck a chord with me in terms of leveraging your efforts:

"I continued with my graduate studies at Arizona State University, picking up my MSEE in 1966. I started but never completed a second master’s degree in anthropology.
My E.E. thesis was on the first integrated circuit metal locator. Built by biasing RTL logic gates into their linear amplification region. Thus making great diffamps. Real linear IC’s were yet to show up at reasonable prices. The beast was called the IC-67 and ended up on the January cover of Popular Electronics.
Getting Goodyear to pay ASU to let me write a hobby
construction project was an interesting scam. One from which I developed the concepts of reversing cash flow and letting others pay you for your fun."




The New Zealand Search Engine

Hi Dien,

You have this fascination with the movie character Gordon Gekko and so do I.

I wouldn't necessarily want my sister to marry the guy, but some of the principles (the legal ones, that is) he stands for and uses can be valuable lessons for of us who are in business.

Your post was of particular interest to me because I am writing a book on Timing the Stock Market. The Forbes 400 examples that you mentioned about the need to take "calculated risks" will likely be incorporated into my sales letter.

But what about our friend Gordon Gekko? Because the entire Gekko thing is about gaining an advantage for making profitable stock market decisions -- and the Forbes 400 examples are not -- do you think this can be effectively used in a sales letter as well ... or do you think most people will be turned off by the illegal tactics Gekko uses to achieve his goals?

Any thoughts?

Robert Campbell


Timing the Real Estate Market

> I, for one am studying Buffett's investment
> strategies to figure out why his strategies
> work
> and my broker sucks.

This is a very brief summary of how I view investing and Buffett's style:

1. Investing is about predicting how much money a company will earn, discounting it to present value, and coming up with a value for the company.

2. You can do this with any asset, whether it's a property loan, a bond, a share, or property.

3. You therefore need to make predictions about the future. Different assets will be more predictable than others. Predicting the sales of Coca Cola in 5 years is probably easier than predicting the sales of a new tech startup with no current sales.

4. Buffett focuses on (1) businesses he understands, and (2) businesses with strong competitive advantages. I view this as essentially maximising his predictive ability, and thus his accuracy in making good investments.

5. A strong competitive advantage means that your future earnings are more competitive, because they are less dictated by the actions of competitors or market conditions generally.

I think that basically sums it up. Of course there are many more specifics, like what are the sources of competitive advantage, and so forth.

If you apply those principles to your own investing and research competitive advantages more, I imagine your returns will be higher than normal. Will you make it into the billionaire list? Probably not, unless you have a lot to start with.

To do that, you need leverage. And I use the term quite broadly. There are a few ways to do this. Sticking strictly to investments, you can manage money for others and earn a cut, if you're suitably qualified, and thus your personal return is leveraged up from the fees earned from your investment skill.

Most people on this board are entrepreneurs though, rather than investors. So how does leverage relate to them? Well, in its simplest form, it is about finding an opportunity to sell something at a profit and then finding a way to provide it at a lower cost, typically through hiring of people and good purchasing. Doing this, in my opinion, is a form of leverage and one of the keys to getting into bigger business and one day seeing your name in the pages of Forbes.

- Thomas.




http://www.thomasrice.com

I thought you could add a comment to your post about the total irrelevance of WB's method to ordinary investors. Mr. Buffett does not make his money on the markets. He takes control of companies and sets performance targets. He then uses their cash reserves for more acquisitions. This is why he buys insurance firms (which have free cash) & ignores tech stocks (most have burn only rates). Obviously this has nothing to do with trading/investing. Masses of people have been misled by all the hype claiming they can use his methods.

Warren Buffett is one individual who can make the buy and hold illusion look smart. But, let's take a look at why this strategy is dangerous to your portfolio despite Buffet's success.

I am writing this without any malice towards Mr. Buffett and I am not trying to lesser his personal achievement and the good fortune he brought to his investors.

Buy and hold only works well when prices move in your favor. The following advice is better suited to the average investor - when one is caught on the wrong end of the move – one must exit at one point and admit defeat. That is - unless one can take control over the company and control the companies’ cash. Then the consideration of common stock prices is of no importance. Sadly most of us do not have the deep pockets to do such.

What escapes most investors is the mathematics of risk reward commonly known as the edge. If the investor can maintain a risk reward ratio of 1:3 at minimum he/she will be successful in the long run. (Actually risk reward should be higher but risking $1 for every $3 made is a good minimum basis.)

What does this all mean? This explains the earlier statement concerning buy and hold drawback. When taking a position the investor should have some idea of the time frame of his investment and in reference some stop loss limit should be set. Whether mental or actual is a subject of a different article.

Andras Nagy
www.coach4traders.com




The Trading Coach

While WB does acquire whole companies from time to time, he does make investments on the stockmarket, such as his investment in Coca Cola and Gilette.

One of the fundamentals of his approach is the view that buying part of a listed company is no different to buying an unlisted company, or at least the two are not different from a valuation perspective.

You are correct in saying he can channel the cash of some companies he buys, but I don't think that means his approach is irrelevant to everyday investors.

All it means is that you need to look at both the operating characteristics and the capital management skills of the people running the companies you are investing in.

That is, if a company produces a lot of cash, you need to see what they do with that cash and whether it's a good decision. If management are making good decisions, what difference does it make if you personally channel that cash or management does what you would do anyway?

In almost all cases Buffett buys companies where management is not changed, also, so their capital management decisions usually remain unchanged.

Insurance companies, and the leverage Buffett gets by using their free float, is a different matter and certainly is different, but it's important to remember he often uses that free float to invest in non-insurance companies, and the principles used to make those investments can be applied by "ordinary" investors.

While it's true that small shareholders cannot access the cash of companies they invest in directly and immediately, this does not mean any underlying "fundamentals" are suddenly irrelevant. If a fundamental valuation strays too far prices, prices will be adjusted in the long-term. If this does not happen through individual investors moving the price, it will happen when a large investor buys up the company and efficiency is restored. Alternatively if the fundamentals and prices get completely out of whack -- for example if the company has $20 billion in cash, no debt, but is worth $10 billion on market -- shareholders can always vote to return that cash.

Regarding time frames, my approach is to look at how valuations compare to prices over time. I liek to buy things where I think the true value of a stock is higher than its current price, and sell when it corrects itself or a better opportunity arises.

The "buy and hold" approach over a long time mainly works when the value of your company is increasing over time, as happens when a company grows, and can be better than some other methods due to reduced transaction costs and taxes, which can be quite significant.

- Thomas.




http://www.thomasrice.com/

Hi,

I wish I could do like WB did, namely buy 130 million ounces of physical silver, take delivery on a bunch of it and ship it to London for storage.

My understanding is that silver is at close to a 5,000 year low in price, know what I mean, can you believe that? If silver went to $50 an ounce I wouldn't be surprised. I don't even want Buffett's 130 million ounces, 20,000 ounces would be fine for my needs.

--sigh--

- Boyd

I watch the movie WallStreet almost weekly. I have done so for the last 3 years. There are nuggets there. There are also major learning lessons in the Forbes list. I spot the steady players and read up on em. No Joe Kumars there.

I also started playing with the "gekko" character online by playing with the name a bit. Even giving him his own website.

www.roadtoforbes.com.

Who knows. Maybe there someday.

I LOVE this forum...

Good thread
Jscott Gekko/gecko
The softer side of Gordon Gekko
> Hi Dien,

> You have this fascination with the movie
> character Gordon Gekko and so do I.

> I wouldn't necessarily want my sister to
> marry the guy, but some of the principles
> (the legal ones, that is) he stands for and
> uses can be valuable lessons for of us who
> are in business.

> Your post was of particular interest to me
> because I am writing a book on Timing the
> Stock Market. The Forbes 400 examples that
> you mentioned about the need to take
> "calculated risks" will likely be
> incorporated into my sales letter.

> But what about our friend Gordon Gekko?
> Because the entire Gekko thing is about
> gaining an advantage for making profitable
> stock market decisions -- and the Forbes 400
> examples are not -- do you think this can be
> effectively used in a sales letter as well
> ... or do you think most people will be
> turned off by the illegal tactics Gekko uses
> to achieve his goals?

> Any thoughts?

> Robert Campbell

Hi Robert,

I've been meaning to reply to your post for a while (sorry for the delay)...

> But what about our friend Gordon Gekko?
> Because the entire Gekko thing is about
> gaining an advantage for making profitable
> stock market decisions -- and the Forbes 400
> examples are not -- do you think this can be
> effectively used in a sales letter as well
> ... or do you think most people will be
> turned off by the illegal tactics Gekko uses
> to achieve his goals?

Hmmm... I'd be wary, I think...

I think among financial types, they'd probably see Gecko in a mostly positive light. But I'm not sure if "Joe Public" would see him the same way! He might see Gecko as representing all that is evil about making money and finance!

I don't have a good feel for it... Perhaps it could be a good idea to talk to several people who you feel would fit into your target market. That could help give you an idea of what the average person thinks.

In my case - I'd see it as a positive, because I find Gordon Gecko a fascinating character. However, I'm not sure that most others think the same way!

Not sure if that helps, but anyway... Any excuse to talk about Gordon Gecko is a good discussion to me. ;)

Cheers,

Dien