Notes on "What I Learned Before I Sold to Warren Buffett"

1. Perhaps one of the key reasons Warren Buffett has been the world's most successful investor is that he does not buy turnaroud opportunities, only successful companies.
2. To know our people is to love them.
3. At Helzberg Diamonds, I sent personal hand-written notes to the folks who got great customer comments thanking them, and those notes found their way to the bulletin boards and stayed up quite a while.
4. One of the worst plans I ever instituted was having managers act as owners by rewarding them purely on a profit basis. This plan ultimately backfired because some store managers became excessively concerned with overhead rather than sales. Bonus should be based on both sales volume and net profit because profits are short term and volume is long-run.
5. You have your best people be the pioneers to prove whether it's doable or not, and then have them evaluate and refine the best techniques for getting it done. --Set the standard for success.
6. The longer you wait to communicate, the less sincere it appears.
7. The longer you wait on action that is high-priority, the less favorable the outcome will appear.
8. Set a reasonable time limit to make a decision.
9. List the pluses and minuses of each potential decision.

Notes on Talk Five

1. It turns out that the truly big ideas in each discipline, learned only in essence, carry most of the freight.
2. I know no person in business, respected for verified good judgment, whose wisdom-maintenance system does not include use of such periodicals.
3. Soft science (social science) should more intensely imitate the fundamental organizing ethos of hard science (defined as the fundamental four-discipline combination" of math, physics, chemistry,and engineering).

Fundamental organizing ethos:

• You must both rank and use disciplines in order of fundamentalness. 
• You must, like it or not, master to tested fluency and routinely use the truly essential parts of all four constituents of the fundamental four-discipline combination, with particularly intense attention give to disciplines more fundamental than your own. 
• You may never practice EITHER cross-disciplinary absorption without attribution OR departure from a "principle of economy" that forbids explaining in any other way anything readily explainable from more fundamental material in your own or any other discipline. 

Richard Feynman: Renowned physicist. He worked on the Manhattan Project and was instrumental in the development of the atomic bomb. He was named to the commission that investigated the Challenger Space Shuttle accident. he demonstrated the effect of cold temperatures on rubber O-rings and showed how the resulting shrinkage allowed hot gases to escape, causing the explosion.

Practical Thought About Charlie Munger's "Practical Thought About Practical Thought?"

Today's reading for me is my role model, Charlie Munger's talk to a group that has a policy of not publicizing its programs. Below are the wonderful quotes from Charlie:

1. Where elementary ideas will serve, your problem solving must not be limited, as academia and many business bureaucracies are limited, by extreme balkanization into disciplines and subdisciplines, with strong taboos against any venture outside assigned territory.
2. It is not usually the conscious malfeasance of your narrow professional adviser that does you in. Instead, your troubles come from his subconscious bias.

3. 5 helpful notions

• It is usually best to simplify problems by deciding big "no-brainer" questions first
• Without numerical fluency, in the part of life most us inhabit, you are like a one-legged man in an ass-kicking contest. 
• Invert, always invert
• The best and most practical wisdom is elementary academic wisdom. But you must think in a multidisciplinary manner. 
• Really big effects, lollapalooza effects, will often come only from large combinations of factors.

4. The best way to avoid envy, recognized by Aristotle, is to plainly deserve the success we get.
5. The standard deprival super-reaction syndrome makes "take-aways" so hard to get in any type of negotiation and helps make most gamblers so irrational.

May 3rd

I've changed the name of my blog from Value Investing & Rational Trading to "Value Investing in Graham-and-Buffettville.

After another year of reading and experience, it is more clear to me that technical analysis is not for me. Seth Klarman and Warren Buffett both mentioned that value investing is really a genetic thing, you either click or do not click and I now totally agree. Charlie Munger once said " the game is so tough, why not adopt another approach- swimming as competently as you can, sometimes the tides will be with you and sometimes the tides will be against you but by and large, we are not bothered by the general movement in the market." I couldn't agree more with this. Predicting the market is extremely difficult, if not impossible and people who claim they can predict the market or have correctly predicted the market did it by luck. In the end, it all boils down to buy the business with sustainable competitive advantages you know well at a reasonable price.

Another thing I learned ( again, Warren and Charlie had told us before) is that buying shares of a great business at a fair price is absolutely better than buying an so-so business at a great price, and certainly way better than buying shares in a troubled company at a cheap price even it's a cigar butt candidate. I've seen and experienced buying troubled companies trading at a discount to their book value (sometimes even 30% to 40% discount) and it definitely does not feel good seeing another 30% or 40% drop. Examples include Nokia, First Solar, Research in Motion, Radio Shack, and Netflix. The eventual turnaround may happen, but may come with the cost of many sleepless nights. These cigar butts investments still have value in them, and you want to buy them at maximum pessimism, which is hard to predict and "lower lows" are almost certain to happen down the road. I am not sure what is the right approach to these investments but one thing I learned from my experience is that setting a larger margin of safety and wait another few months will make them even less risky investments.

There are other useful lessons that I've learned from reading and investing during last year and I will gradually put them up here.

I will be going to Omaha NE tomorrow for the annual meeting and I expect it to be the best learning experience ever. Stay tuned.

Some Reflection

The market has been extremely volatile during the last couple of months. The first big lesson is so obvious but I doubt many people were doing it when the media was so bullish: whenever all major markets show Head and Shoulder pattern, get very defensive( using Inverse ETFs and selling covered calls).
Furthermore, always pay attention to some warnings as shown by various charts such as the following

From the charts above, we can see that the market is heading into some serious trouble mid-late July. Even some early warnings are give back in March and April ( For Example, Bonds start to outperform SP 500 and Large Cap start to outperform Small Cap).

In reflection, the media ( especially CNBC ) was extremely bullish back in April. Yes we did have a stella earnings season for Q1 2011 but that doesn't justify DJIA can break above 13000 and head to 14,000. A couple of analysts on CNBC were expressing their belief that Dow is heading to 14,000 which no proved to be some big joke. Lessons learned again, media's always late and wrong, charts don't lie.

August and September have been weak, especially September. Paying attention to seasonal analysis and sector rotation would be tremendously rewarding. 

July 5th-- Always stick to the system.

Today's lesson learned: Don't take any trade or take maximum 1 trade when your portfolio is performing well.
Winning trade: SQNS Profit: 12%
Losing Trade: PWER:  Loss: 4.85%

Why did I lose: 1. I justified a wrong entry signal just to make a far-fetched falling rectangle.
                        2. Didn't notice CMF was mainly below -0.1 during consolidation, which is a bad sign.
                        3. Exited at noon because I had to rush out and sold at the exact bottom again.
                        4. NO CLEAR ENTRY SIGNAL AT ALL: PURE GREED AND EUPHORIA!!.

2011 July 1st-One Rational Trading and One Emotional Blunder

Overall, today was a good day, my portfolio has outperformed the market for more than 7 days in a row. However, I made one almost unforgivable mistake. We'll dig in later.

I closed out 2 positions today, JMP and POZN. 

1. JMP 

Enter Price: 5.99  

Exit Price: 7.12 

Profit: 22% 

Days Held: 5 days

Trade Entry Signal: V shape reversal with William % R and Full STO oversold, Bullish MACD crossover. 

Fundamental: P/E 15  EPS: 0.47 

Exit Signal: 6 long white candles followed by a doji. 

2. POZN

POZN is a fundamentally pretty strong stock with p/e around 6.5 and EPS 0.67, it was rated one of the most efficient pharmaceutical companies in America. 

Mistakes made: 

1. No clear Entry Signal. 

2. Let fear get in the way. 

3. MACD was showing positive divergence, no clear exit strategy at all. 

4. Got flushed out as weak hand, sold at exact the bottom around 4.18. It was a loss of 16%!!!