31st January 2007, 03:09 pm
Opening remarks by Mr. Buffett
Everyone has the potential to achieve their dreams. The point is to get out of each of us what we are capable of producing. I will invite you to play a game. Suppose that when this class ends, you have one hour to pick a classmate that you will own 10% of his or her earnings for the rest of their life. Besides picking the one with the richest father (laughter ) you would choose the person who is most effective. I would predict that you would not necessarily pick the student with the best grades or highest IQ. Instead, you would look for someone with the most integrity and intelligence. Think about the person that has a 300 horsepower motor and operates at 300hp and compare that person to someone who has a 400hp motor but operates at 150hp. You would pick the 300hp everyday.
My point is to suggest that you should become an effective human being…the chains of habit are too light to feel until they are too heavy to break!
Click here for the full interview.
Editor’s Note: The above transcript is the courtesy of Mr. Sham Gad, who had a privilege to meet Mr. Buffett in Omaha, Nebraska along with 50 of his fellow MBA classmates. He says “As expected, the Sage of Omaha was full of humor while dispensing his unique, masterful thoughts on business and life.”
Enjoy the article!
31st January 2007, 02:55 pm
Conclusion: One way of looking at market valuations is to find out the number of years it could take the market to reach a certain level. In our base case, the BSE Sensex (used as a market proxy) could take almost 13 years to breach 50,000 from its current level. If the assumptions are optimistic, the period to 50K shrinks to under ten years.
What’s New: The critical success factors for returns and hence the period to reach 50K include some obvious ones such as GDP growth, interest rates, the inflation rate and the success of India’s infrastructure roll-out. A less obvious but increasingly accepted factor is global risk appetite, which has a bearing on the expected rate of return and hence the actual rate of return. Some of the least obvious factors include the pace at which Indian companies globalize, the rate of wage increases, the investment rate, the estimated asset life in the books of accounts and capital structure alterations.
Implications: That the long-term return implied by the BSE Sensex using our residual income model is 11% under the most probable outcome is not a source for comfort since this return may not be able to compensate investors for the risks involved in investing in India. However, this return appears consistent with the current low levels of risk appetite still making Indian equities attractive in the context of current high levels of risk love. If things turn for the worse, the probability of which appears to be higher than usual, long-term returns could end by being just a tad better than the yield offered by government long bonds. For investors to be compensated with the return and risk premium they deserve (which we think is 14% given the risks associated with Indian equities), the critical success factors listed above may have to exceed our most bullish assumptions over the coming years.
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31st January 2007, 01:20 pm
Random Readings:
Additional Reports:
Off-Topic Readings:
Parting Thought:
- I put heavy weight on certainty. It’s not risky to buy securities at a fraction of what they’re worth. – Warren Buffett
29th January 2007, 04:09 pm
The frailty of forecasting.
Some days it seems as if the world is divided into two groups, those who forecast that the DJIA will soar to 36,000 very soon and those who forecast, with equal confidence, that it will plummet to 3,600. We argue that forecasters often exaggerate the reliability of their forecasts, and trace this exaggeration to the illusion of validity.
“People are prone to experience much confidence in highly fallible judgment, a phenomenon that may be termed the illusion of validity,” write Kahneman and Tversky [1973]. “Like other perceptual and judgmental errors, the illusion of validity persists even when its illusionary character is recognized” (p. 249).
We discuss five cognitive biases that underlie the illusion of validity:
- Overconfidence,
- Confirmation
- Representativeness
- Anchoring &
- Hindsight.
We use forecasts based on P/E ratios and dividend yields to illustrate the biases and offer remedies.
Editor’s Note:
This is an award winning research paper by Kenneth L. Fisher, which discusses futility of market forecasts. It was published in Fall 2000 issue of The Journal of Portfolio Management.
Please note that the figures published in this report are of the U.S. markets but the insights provided in it are applicable to every capital market.
29th January 2007, 03:38 pm
Random Readings:
Additional Reports:
Off-Topic Readings:
Parting Thought:
- If the business does well, the stock eventually follows. – Warren Buffett
