Buffettology
I read the book Buffetology by Mary Buffet back in 1999. This was before Warren Buffett was as well known as he is today, but he was still a huge deal.
The book taught me many things. I got totally hung up on trying to understand the intrinsic value calculation which Mary Buffett explains extremely well, it’s just that I don’t have a complex math problem brain.
A few of Warren Buffett’s key tenets are to invest in what you know and use everyday. Hence his success with Coke, Dairy Queen etc.
I used this technique for one stock transaction which I will share with you now and I will expand a little on picking stocks in other posts.
I opened my cupboard and looked at things that I purchased every week. Some of the brands already had more than I could afford stock prices, but I did settle on Greens (no longer a thing which you will understand shortly). They made cake mixes among other things. I always bought their pancake mix and chocolate cake mix because it was usually 50 cents cheaper than the others and always turned out well.
When the stocks were still in the newspaper, I picked up one and looked at the company. It was trading under $1.50 per share. I noted the volume it was trading at as well. From what my dad had taught me and what I learned from the book as well, I underwent a stock stalker situation and read everything about the company I could and watched the volume and stock price movement for 2 weeks.
An interesting thing happened about a week in. The volume DOUBLED and the stock price stayed constant. Then the next day volume increased again and the stock went up 2 cents. When there is a large change in volume and the price goes down – this is bad. If the stock goes up – this is generally good. If it stays the same – someone knows something you don’t.
So I bought $500.00 of shares from the money I found in the washing machine .
Within a month it had doubled and within 6 months when I had to sell (more on that in another post as well) I returned $2500.00 so a 400% profit. Hell yeah!
So what was going on? I still didn’t find out. All I could tell you was that the stock kept going up and the volume was acting intermittently. Some days spiking and other days flat.
It turns out that the company was taken over by a larger food company and my friends, there was some serious insider trading going on, nothing that you could take to the ACCC, but there nonetheless. Only those in the know were buying up the stock so cheaply knowing that a takeover was either coming or being pursued. I just lucked out.
So what did I learn?
I learned that Buffett was pretty much right in terms of picking stuff you know. I also learned that my dad, as always, was right by watching a stock and its volume. The volume and price movements tell you a LOT.
So my advice to you in this regard if you choose to invest in stocks directly, is to pick a stock – any stock (no it’s not a stock trick) and start watching it. Pick 10 if you want. Something that is not in the ASX 200, 400 or 1000 though. Those things move around a lot each day. You want something out of the limelight but within an industry you know. Maybe you heard some gossip or read an article that made you think – hey wait a minute, that means that XX could happen if they buy them. Trust your hunches.
If volumes spike and the stock price stays the same or inches upwards, you’re onto something. Now, how much do you want to play with? Totally up to you. I am risk adverse generally because I lost $80K overnight in the 2008 debacle and I can tell you I was sweating bullets over my $500 investment back in 1999. It’s not a good thing for me. Wait until I tell you about my options trading experience (yep you guessed it, in another post). Anyhoo trust your gut and your risk assessment and try it if the signs are good. I know the market is filled with skittish possums right now and it’s going up and down for no reason, but stocks outside of the top 1000 generally are unaffected (to a drastic degree) with these big movements.
Another tip is to read the financial press. Warren Buffett once said that anyone who reads the paper and the financial press everyday knows more than the monkeys on Wall Street and I believe he is right about that. So start educating yourself, keeping or even getting in touch. Don’t worry about the terminology if you don’t understand it. Just read the stuff you can understand. There are lots of biography and general articles about business, opinions etc and it all helps form your decision making.
If you want more on Warren Buffett go to the Berkshire Hathaway website and read his annual addresses. You will gain some huge insights into the man.
Other books on Buffet you might like
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