Worry Time?

Ok, if you look at the economic indicators I called last Sunday I did really well.  Of the 15 or so guestimates I made, I was batting about 72%.  My big mistake was underestimating how low volume would be all week as Mr. Market waited for Mr. Bernanke's say nothing speech.

My guess was that the market would be off 4-5% on the week and we only got as low as 1% on Thursday and ended up about .5% down due to the assumption that Bernanke Speek (remember Greenspan Speek) implies we will have QE III.  (For the record, after reviewing his speech, I do not see where he guaranteed a QE package.)  

We will be reading our Barron's cover to cover this long weekend.  We did quite a bit of homework today and some back to basics reading as well.

We read a great piece by Dr. Steve Sjuggerud from Stansberry and Associates.  It was a great refresher for what you need to know to be a successful Investor.

We will summarize as best we can without ripping off the entire article.

Have at least a two year window for investing.  The longer the better.  Methodical stock investing when done properly takes time.

If you are new to the game, start with a small stake and work your way up.  If you have a chunk of change, don't plop it all down at once.  Ease into it as you will make mistakes and it is a learning process.

(One of my rules)  If you don't know how a company makes money, really makes money, don't invest in it.  So many times people have said you have to get into DEF company because I just read that they . . .   When I ask how do they make a profit, they are usually at a loss as to explain how the company generates free cash flow and how the company uses it.  Several of our readers got sucked into the the Facebook deal.  You know I did two days of explaining it was not clear how this company was going to justify a times 70 PE ratio.  It hit a low today.

Keep your expectations in check.  (I am guilty of this.)  I have a few holding right now that are 22%, 41% up and I think they should be higher.  I have to remind myself that the 10 year treasury yield is 1.5%.  My usual goal for a return is two times the ten year or twice inflation.  Either number puts me at 3-4%.  If you have a position with a 10% or better return, protect it will all you skill.

Be diversified and if you can't determine how to do that buy and index fund that tracks the NASDAQ or The S&P 500.

Pay attention to history as it does repeat itself.  Right now, despite all the uncertainty, we are hearing some fairly bullish comments by a lot of folk.  The market is up 11.7% over the summer.  When people are feeling this confident, it make me start thinking about taking some profits.  Bad never stays bad forever and good never stays good for ever.  You should time the market, but pay close attention to it.

Don't fight the market.  If the green flag on this blog is not flying, it probably is not a good time to buying new positions or taking risks.  We are in a confirmed uptrend or bullish market.  It has been a gradual patient bull market.  If you do your homework, there is nothing technically wrong with starting or adding to a position now.

The best way to make money in the market is to not loose it in the first place.  I have lost more money by not following this rule.  (Especially in options).  Know where you will get out of a position BEFORE you get in the position.  If you buy XYZ at 50 a share know that you will get out when it drops 7, 8, or 10%.  (We use an 8% stop).  If the stock goes up 20%, re-evaluate the stock and decide if you want to keep it, take the profit it reset a new stop from the new high guaranteeing a gain.

And lastly if you are unsure about the investment, don't make it.  When people told me they were buying Facebook at the IPO, I asked for three good reasons why and "Because veryone is on Facebook." Was not an acceptable answer.  NO ONE COULD GIVE MY TWO GOOD ANWERS.

Great helpful article from one of the Stansberry Newsletter.

Keeping the ideas fresh in my mind, I decided to go to my core holdings and begin to evaluate one a week and publish it here.

2012 8 31 BRKA Current $126,560 Cost Basis $119,966

First Purchased Feb 2012.

Berkshire Hathaway is a holding company with a wide collection of subsidiaries engaged in a number of diverse business activities. The firm's core business is insurance, run primarily through GEICO (auto insurance), General Re (reinsurance), Berkshire Hathaway Reinsurance, and Berkshire Hathaway Primary Group. The company's other businesses are made up of a collection of finance, manufacturing, and retailing operations, along with railroads, utilities, and energy distributors.

In all honesty, I always wanted to say I had a few shares of Berkshire.  As I read more about the company and Buffet, the more I liked it.  Buffet is a true value based bottom feeder.  A life long fan of Graham and Dodd, the fathers of value investing. Buffet's style is find a 2 dollar stock selling for 1 dollar and buy it.  Wait for it to become a 2 dollar stock no matter how many decades that might take.

Recently Buffet has brought on two assistants, Ted Weischier and Todd Combs to work with Buffet in his golden days.  They now oversee much of the new investments of BRKA.  Recently these guys have sold off key holdings in JNJ and PG (Both on our core holding list).  They have taken larger shares of WFC and IBM lately.  In the last 13-F filing they have also added to positions in NOV (actually a new position), LMCA, COP, DTV, and DVA. 

The real heart and soul of BRKA is its insurance business.  It is what drives a lot of their free cash flow.  The own GEICO, General Re, and Berkshire Hathaway Reinsurance.  Beyond the insurance business, BRKA also owns Burlington Northern Santa Fe, Mid American Energy, McClane food distributing, Marmon, Shaw Industries, Benjamin Moore Paint, Fruit of the Loom, Dairy Queen, and Sees Candies to name a few.

Berkshire's non-insurance operations include a wide array of businesses from Burlington Northern Santa Fe (railroad) to MidAmerican Energy (energy generation and distribution), McLane (food distribution), Marmon (manufacturing), Shaw Industries (carpeting), Benjamin Moore (paint), Fruit of the Loom (apparel), Dairy Queen (restaurant), and See's Candies (food retail). Of the more than 70 non-insurance businesses in its portfolio, the two largest contributors to Berkshire's operating earnings are BNSF, which the firm acquired in full in February 2010, and MidAmerican, in which Berkshire maintains a 90% stake, having initially added the company to its holdings more than a decade ago.

Current valuation estimates peg BRKA's value, if broken apart and sold would be 153-180 thousand a share.  This gives a huge margin of safety.  This will be in our holdings a long time.

This analysis was done using the following sources.  FINVIZ.com, AAII, Barron's, Charles Schwab, UBS, IBD Publications, Morningstar, Yahoo Finance, The company's website, Value Line publications, WSJ, The Financial Times, and Bloomberg.   We encourage readers to access these sources when doing your own homework.