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The secret to making real great money in stocks

Nov 15, 2014

In this issue:
» Is this the new Swiss Bank?
» ULIPs are back. Is this a worrying sign?
» A round up of the global markets during the week
» India's poor showing on the HDI front
» ....and more!

It perhaps needs no mentioning anymore that we are avid readers of anything related to Warren Buffett and his investment activities. Consequently, when our attention was brought towards this interesting trivia about the Oracle of Omaha, we were totally willing to oblige.

Trust us, there were quite a few facts in there that the general public still isn't perhaps aware of. Did you know that Buffett actually bought Berkshire Hathaway so that he could fire his CEO? Or the fact that he still carries an ancient Nokia flip phone?

And while we have read this before, what never ceases to amaze us is how much time Buffett spends on reading. As the trivia pointed out, he spends almost 80% of his days reading! Yes, that's right. And what more, in his early career, he was even more of a voracious reader, easily devouring 600 to 1,000 pages a day!

If you thought Buffett is nearly borderline crazy about reading, his partner Charlie Munger can easily give the Oracle a run for his money. As a matter of fact, Charlie's own children joke that their father is actually a book with a couple of legs sticking out!

Now, this as odd a fact as it comes. There would be very few companies on the face of this planet that are into as many industries as Berkshire Hathaway is. And yet, its owners spend most of their time reading. Does this not fly in the face of conventional wisdom? Well, it really doesn't if one has an idea about how the real big wealth can be made in stocks. And this is what Buffett and Munger really excel at.

You see, as per Buffett and Munger's own admission, they are clearly not the smartest of investors out there. However, if there is one edge that they believe they have it is the ability to stay patient and wait for that great opportunity to buy stocks that presents itself every few years.

Well, if you've had a good long career in investing, you would know what they are talking about. The fact that every few years, there comes a time when the bottom falls out of the market is perhaps the only truth in investing that comes close to the law of gravity in physics.. This is the time that even the bluest of blue chips is available at extremely attractive valuations.

And this is exactly the kind of opportunity that Buffett and Munger wait for. They don't believe that when markets are fairly valued or overpriced, you get a lot many good opportunities to buy. You will no doubt still make money but the truly big money is really made when stocks are down 50%-60% owing to some short term fears. And if you've done your homework well, which is what they do by their enormous reading and just gathering facts, then one can really make a killing. After that, you just need the magic of compounding to do its work.

So there you have it. The secret to making real big money is not about moving in and out of stocks frequently after making small gains. But to actually wait for that great opportunity to show itself up at your doors and spending the rest of the time just reading and gathering as much information as you can on it.

What do you think? Do you think the real big money is made by waiting patiently or through some other methods? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
While the usual talk about Gross Domestic Product (GDP) and GDP growth rate indicates the average quality of life in an economy, what that data does not highlight is the minimum quality of life therein. Today's chart of the day takes this view of things. It highlights the amount various governments around the world spend as a percentage of their country's GDP on ensuring a certain minimum lifestyle for its denizens. This is spending on things like unemployment benefits, support for the sick and disabled, pension for the old, etc.

India's position looks dismal on this count, even by emerging country standards. In fact, India's rank amongst 187 countries for which data has been complied is 144, an indicator of the fact that just how neglected this space is in India. And since the government is not doing a very good job here, this also leaves a lot of scope for innovative and efficient companies in the private sector to step in and serve these needs.

Social protection highly neglected in India

Black money has found a new haven. As shifting money to Swiss accounts is no more as discreet as it used to be, black money is chasing yellow metal now. A lot of unaccounted money is being used to smuggle gold into the country. Given the obsession for yellow metal, a huge gold market, easing gold prices and high import duties in India, around 200 tonnes of gold has been smuggled in the country. It is noteworthy that this amounts to a quarter of the total annual gold demand. And while Swiss banks were an option for privileged few, gold is the new Swiss bank account even for a medium sized black money hoarder (with bigger players stashing money in real estate). What is further bothering are restrictive internal and external gold trade policies that seem to be fuelling the trend. The message is clear. The only way to tackle black money issue is implementing effective laws on tax evasion and money laundering and limiting crony capitalism. Else it will soon find way to other asset classes like gold and real estate, putting at stake the stability of Indian economy.

On several occasions in the past we have expressed our skepticism towards Unit Linked Insurance Plans (ULIPs). With retail investors flocking back to the stock markets, ULIPs are again gaining popularity. And this has got the insurance regulator worried. And why not! An ULIP is nothing but a bundled product that offers elements of both insurance and investment, plus some income tax benefits. But often, people are not well-aware of the extra costs and risks involved. As an article in Livemint points out, the mortality costs in ULIPs are way higher than online term insurance plans.

The other big factor that people tend to forget is the risk involved. The last time ULIPs had become popular was during the previous bull run that ended miserably in 2008. Obviously, investors lost heavily on their ULIP investments and swore never to touch them ever again. But every bull market tends to make people forget the lessons learnt during the previous market crashes. In our view, investments and insurance must remain separate.

Barring stock markets in Germany (down 0.4%) and Brazil (down 2.7%), global indices ended the week on a positive note. The US stock markets witnessed some selling pressures on the last trading day of the week but managed to post a fourth-straight weekly gain. The recently released retail data showed an encouraging picture highlighting increasing spend by the consumers.

The GDP numbers from the eurozone nations highlighted sluggish activity for the third quarter, though they were above expectations. The data indicates Germany and France which are two largest economies in the eurozone nations, to have barely avoided recession. Despite upbeat Eurozone data, UK markets pulled back from six week high levels but ended the week on a positive note.

Majority of the Asian markets were broadly higher for the week gone by. Japan (up 3.6%) and China (up 2.5%) led among the gainers. The Japan markets have hit highest levels in last seven years during the week. The Indian indices, closed at all-time high levels. The overall positive sentiment has helped in the stock rally. Falling inflation and other positive trends in the economy have boosted investor interest.

Performance during the week ended November 14, 2014

 Weekend investing mantra
"In my whole life, I have known no wise people who didn't read all the time -- none, zero. You'd be amazed at how much Warren (Buffett) reads -- at how much I read". - Charlie Munger

This edition of The 5 Minute WrapUp is authored by Rahul Shah.

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5 Responses to "The secret to making real great money in stocks"


Nov 19, 2014

I am making efforts to understand the nuances, before really investing. Hence, whole thing is informative and am gaining knowledge




Nov 17, 2014

My experience shows that real, big money is made by waiting for the golden opportunity when the market price of one of the stocks in yr portfolio shoots up beyond all expectations and then selling off yr shares in part or full, depending on yr appreciation of the market conditions.


ramesh athasniya

Nov 17, 2014

stay invested and keep tight and stay right



Nov 16, 2014

Really the information is very very usful for my knowledge updation as i am able to share in my class while teaching to the students.



Nov 15, 2014

there is nothing like short term and long term. when the prices are down if you wait then one day the prices will go up.if prices are up then one day in the future the prices will go down.the best thing is to take profits piriodically in a bull market.

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