

Rules That Warren Buffett Lives By - edw519
http://finance.yahoo.com/banking-budgeting/article/108903/rules-that-warren-buffett-lives-by

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byrneseyeview
_"Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1."_

I wish he'd state this more clearly. It's not "Don't invest in anything that
fluctuates in price," but "Only invest when you know you're buying something
at less than 100 cents on the dollar, and you also know it's going to be worth
more than that dollar in the future."

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Retric
What makes or breaks on invester is being willing to sell a stock that went up
30% a year for the last 5 years, and being willing to buy a stock that lost
50% of it's value last year.

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byrneseyeview
That may have been true in the past, but there's a lot of money invested in
data mining past returns to find patterns like that. If stock prices are
predictive, who's going to make the better prediction--you, or a team of MIT
CS and Physics PhDs with an unlimited budget and years of experience?

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RyanMcGreal
The problem with the data mining approach is that it works spectacularly until
it doesn't, and when it fails, it also fails spectacularly.

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byrneseyeview
That's true of any strategy in any situation in which your strategy affects
the behavior of whatever system you're interacting with.

i.e. value investing works, but if everyone does it then people will
undervalue intangibles. If everyone chooses to be honest, the first fibber
will rule the world. If everyone is violent, the first non-violent _group_
will waste fewer resources. Etc.

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Retric
There is actually a lot of research into this area (game theory). And for a
surprising number of situations the best and most stable strategy is somewhat
random. EX: Throwing a fastball vs curve ball where the odds of hitting each
depend on which was expected.

While it's clearly not a stable strategy if everyone did the same thing it's
actually fairly hard to consistently beat a basket of randomly chosen stocks.
Which is why I think rating stocks based on their relative value for your
goals and then randomly picking a basket of them is probably the best and most
stable strategy. (Excluding inside information.)

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byrneseyeview
As long as you're smart enough to abstract out of your valuation system, you
can survive. Buffett made his early money buying at a discount to assets: the
company had a $5 million in the bank and their total market value was $3
million. Those opportunities mostly disappeared in the 1960's--conglomerates
bought them out. But Buffett's meta-strategy of buying things at a discount
still worked; it just worked better applied to businesses with a sustainable
competitive advantage.

But if you're not exceptionally good at what you do, yes, some randomness
would help. Though wouldn't the closest analogy to the fastball / curveball
thing be to randomly alternate among asset-management paradigms, instead? Have
some of your portfolio passively indexed, some invested for catastrophe, some
in pie-in-the-sky growth, some in inflation-resistant consumer goods, etc.

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nazgulnarsil
ugh, this again. Warren Buffet is an outlier. Never model your behavior on
outliers. If you want to know how to get rich look at the average rich person
(small business owner).

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zts
While I agree with the advice about outliers, I'm not sure I'd describe the
average small business owner as rich...

Is your personal experience simply different to mine?

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nazgulnarsil
goes the other way. most rich people are small business owners even if most
small business owners aren't rich.

also depends on what level of liquid vs total net worth we're talking.

