Investment Jungle

Pros:

1. Excellent investing information.

2. Very interesting stories about Warren Buffett.

Cons:

1. Too much great information. I have to read the book again!

Rating: ***** (5 out of 5)

“How to Pick Stocks Like Warren Buffett” by Timothy Vick was an excellent read. From reading about Warren Buffett’s personal experiences to a ton of excellent information on value investing, this book is definitely one for your personal library.

There was so much good information that I am going to reread this book. But there were 3 points that really stuck with me that I want to bring up.

Warren Buffett and Charities

There was a discussion on Warren Buffett’s basic frugal nature. And by that, Warren feels that if he pays $100 for an item, then that is $100 less that will be compounding and growing for him. And at the rate that Warren Buffett can compound money, that can become a large amount of money.

But the interesting part is that he even thought that way about charities. Why give the charities $1 million today? Instead of giving them the money today, he decided to continue compounding that money at very high rates. In the end, the charities will be receiving billions of dollars. Had he given them the $1 million earlier, then the total amount at the end would have been less.

I found that interesting.

Comparing Stocks to Bonds

The second item that really stuck with me was this notion that stocks are just bonds with less predictable coupons. Buffett says that a stock is

…a dynamic security that has the capability of providing you less or more income each year than it did the preceding year. Where a bond’s yearly returns are known and can be plotted exactly to maturity, a company’s returns can, at best, be guessed.

I thought this was very interesting. Buffett says that if you must buy a stock, make sure that the company’s earnings coupons:

1. can beat inflation
2. can beat government bond yields, which are priced to reflect inflation
3. can rise over time

So Buffett recommends that you should only buy a stock if its earnings yield (current earnings divided by its current price) is near or above yields on a long term bond. Otherwise, you are better off buying the bond.

The only time you should accept earnings yields lower than the long term bond is when the company is growing its earnings at a very high growth. But if you must wait a few years for the earnings yield to catch up to the long-term bond yield, then you are still better off buying the bond in the short term.

Arbitrage

This was another weapon in Warren Buffett’s arsenal of investing weapons. Warren was using arbitrage in takeover bids. So what would he do? Let’s say that Company XYZ is being taken over for $80 and this is a known deal. Before the deal actually gets done, Company XYZ is still trading on the market. But nobody will pay $80 for it as they know that is what they will end up with by holding it until the acquisition. So you will see that the stock trades under $80. Let’s say for example, the stock is trading at $78. Well, that $2 spread is the amount of the arbitrage. You will basically be paid $2 to hold the stock until the acquisition takes place. When Warren Buffett could not find places to deploy his money (for example, in a bear market) he would use this arbitrage opportunities to prop up his rates of return.

Conclusion

I really enjoyed this book. I found Warren Buffett’s biography and the stories very interesting. There was a lot of information on what to look for when buying stocks (so I will be rereading this book). All in all, a really good book to add to your investment library.

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