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3765088669_bfdfb3a956_t[1]Jim Cramer, host of CNBC’s Mad Money has a net worth of $100 million. He developed his investment strategy while homeless and living out of his car. Very interesting article. http://finance.yahoo.com/news/living-car-cramer-developed-investment-115753521.html

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Did you know that a $10,000 investment in Berkshire Hathaway in 1965, the year Warren Buffett took control of it, would be worth over $40 million today? Berkshire Hathaway has sustained an average return of over 20% for the past 45 years. How does Buffett do it?

Buffett believes in value investing. Value investors look for securities that are unjustifiably low based on their intrinsic worth. Buffett holds stocks for decades, not for months. Here is the basic methodology used by value investors. For more detailed information, I highly recommend the book, The Intelligent Investor by Benjamin Graham.

  1. Has the company performed well? Look at return on investment (ROE) for the last five to ten years. ROE = net income/shareholder’s equity.
  2. Has the company avoided excess debt? Large debt can result in volatile earnings and interest expenses.
  3. Are profit margins high? Are they increasing? A high profit margin indicates the company is executing its business well.
  4. How long has the company been public? Buffett usually considers companies that have been around for at least 10 years.
  5. Economic moat? Does the company have a sustainable competitive advantage by having a well known brand name, pricing power, or a large portion of market demand?
  6. Is the stock undervalued? Is the stock selling for at least 25% less than its intrinsic value?

 

Value investors are concerned with fundamentals such as earnings growth, dividends, cash flow, etc and this requires research and hard work. Value investors buy and hold for the long term, often for decades. Unless you are willing to do the research and understand business fundamentals, value investing is probably not for you. Buffett recommends buying low-cost index funds instead. “A very low cost-index fund is going to beat a majority of professionally managed funds,” says Buffett.

Watch the short video on Warren Buffett’s advice on investing and index funds.

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The world’s most famous investor, Warren Buffett predicts the U.S. dollar will decline and warns investors to avoid long-term fixed dollar investments like the 10 year U.S. Treasury bond. http://www.fool.com/investing/general/2011/03/28/buffett-warns-the-dollar-will-decline.aspx?source=ihpsitth0000001

So, what does Buffett suggest you invest in? Stocks. If you want to invest like Warren Buffett, consider the stocks Buffett holds in high esteem. Coca-Cola (NYSE:KO) is a ubiquitous brand with a serious competitive advantage and efficient business model. Buffett owns about 200 million shares. Wells Fargo (NYSE:WFC) is another company Buffett loves and owns about 342 million shares. Both are solid companies with strong balance sheets and should continue to do well.

In my humble opinion, if you haven’t already bought KO or WFC, you probably missed the boat. Prices have appreciated quite a bit since the March 2009 lows, which was when I bought. I do like Berkshire Hathaway Inc (NYSE: BRKA/BRKB) stock. Why not consider owning a part of Buffett’s company? Class B shares (BRKB) are affordable due to the relatively recent stock split and are priced at about $84. Class A stock sells for about $126,431 a share and is out of reach for most individual investors. Besides price, the only real difference between the two is that BRKA shares come with voting rights.

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When Warren Buffett speaks, people should listen. Among the TV pundits, hedge fund traders and economists, no one has as good of an investment record.

Buffett is the most successful investor in the world. He has never been a market timer or day trader. He buys stocks and holds them for decades. He sells them when the market price is high, not when the market is low. Below are two videos. The first one is Buffett’s personal finance advise and the second is investment advice.

Personal Finance Advice:

Take home message:

-Don’t owe money you can’t pay especially credit card debt.

-Have savings.

-Buy low-cost index funds every month.

-Don’t listen to pundits too much.

Investment Advice:



Take home message:

-Consistently buy low-cost index funds over the long-term.

-Don’t try to time the market.

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I always look forward to reading Warren Buffett’s annual letter to Berkshire Hathaway shareholders. He gives free advice and there are always valuable lessons we can learn.

Mr. Buffett is one of the most successful investors of all time. Called the “Oracle of Omaha”, Buffett is chairman, and CEO of Berkshire Hathaway. A $10,000 investment in Berkshire Hathaway when Buffett took control in 1965 would be worth more than $50 million today.

Here is some of Buffett’s sage advice from his annual shareholder letter that I found interesting and wanted to share:

  • Prepare for the future because the future is always uncertain. You don’t know what tomorrow will be like. Have a large emergency savings fund. For example, Berkshire Hathaway has about $20 billion in reserves.
  • Avoid debt. Do everything in your power to avoid consumer debt. When you are in debt, you struggle to make ends meet. This can snowball into worse things like bankruptcy and foreclosure. Be wary of leverage.
  • Prepare for the positive. Tomorrow may hold something disastrous, but it may also present some wonderful opportunity.  This is another argument for having lots of cash available. You will be well prepared to handle the negatives life throws at you and take advantage of the opportunities.

Included in the annual report, Mr. Buffett included a touching letter sent in 1939 from his grandfather Ernest. The letter gives excellent advice on the importance of having cash reserves. The letter from his grandfather can be found on page 23. Click on the link to read the full report to shareholders. http://www.berkshirehathaway.com/letters/2010ltr.pdf

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Starting a Roth IRA for a minor child is an excellent way to save for his or her retirement because it will grow tax-free for fifty or more years. Here is what you need to know about Roth IRA’s for minors:

-Age requirements: None. The only requirement is the child needs earned income. According to the IRS, earned income is all taxable income you get from working.

-Does a part-time job or paper route count? Yes.

-Does babysitting or mowing the lawn count? Maybe. It may qualify as earned income if proper receipts and records are kept (check with your tax professional).

-Does an allowance or gifts count? No.

-Contribution limits: Only as much as the child earns up to $5,000 limit for 2010 and 2011.

-Drawbacks? The only drawback is ownership belongs to the child when he/she reaches 18. That means the money may be spent instead of growing tax-free. This should not be a problem provided you educate your child on the benefits of a Roth IRA.

-How do I open an account?

  • Determine eligibility of child with tax documents such as a W-2 form.
  • Check with your bank or brokerage firm. Not all will agree to open an account for a minor. Citibank, Bank of America, Charles Schwab, and E Trade have in the past.
  • Prove income to the bank/brokerage firm by showing the minor’s W-2 form, W-4 form, or other proof of income documents.
  • The parent or guardian must also sign the application.

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According to Forbes, the fear of falling victim to fraud is one of the top reasons why people fail to adequately invest their money. The New York State Office of the Attorney General lists unsolicited phone calls, faxes, emails, high pressure sales pitches and promises of extremely high returns as common indicators of scams. So what were the most common scams of 2010? Here is a list of the Better Business Bureau’s (BBB’s) top scams and rip-offs of 2010:

  • Job Hunter Scams– Scams targeting job hunters vary and include attempts to gain access to personal information such as bank account or social security numbers and requirements to pay a fee to be considered for the job.
  • Debt Relief and Settlement Services– Complaints to BBB about debt relief and settlement services increased by about 30 percent in 2010, according to tentative year-end estimates.
  • Work from Home Schemes– Some work from home schemes promise to teach the secrets to making money online, others claim you can make money assembling items at home or get paid to be a mystery shopper. Some victims even found that their opportunity to work from home was a job to fence stolen goods. The result is that instead of getting paid, you can end up losing hundreds-if not thousands-of dollars.
  • Timeshare Resellers– Complaints to the BBB about the timeshare industry increased by over 40 percent in 2010. Timeshare owners who are desperate to get rid of their costly vacation property are being targeted by companies that claim they have an eager buyer. The company tells the seller they just have to pay up to several thousand dollars to cover fees. After paying the fees, the seller never hears from the company again.
  • Not So “Free” Trial Offers – Misleading free trial offers online for diet supplements, penny auctions and money-making schemes blanket the internet resulting in thousands of complaints ever year. The free trial offers seem no-risk but complainants state they were repeatedly billed every month and found it extremely difficult to cancel.
  • Itinerant Home Repair/Roofers– BBBs across the country received complaints from consumers who answered a knock from a door to door salesman or itinerant worker who eventually failed to deliver on promises to fix their roof or conduct other work to the home. Complaints to BBB about roofing companies increased by roughly 40 percent in 2010, according to tentative estimates, due in part to one company that solicited door to door, American Shingle, which received nearly 1,000 complaints nationwide after going bankrupt and not providing new roofs to angry customers.
  • Lottery and Sweepstakes Scams– The victim (often a senior citizen) receives a letter in the mail or phone call from someone pretending to be with Reader’s Digest, Publisher’s Clearing House or a phony foreign lottery. The scammer claims that the victim has won millions but must first wire hundreds or even thousands of dollars back to the scammers to cover taxes or some other bogus fee. The victim wires the money, but the prize never arrives.
  • Identity Theft– There is any number of ways a person can become a victim of identity theft. Through low-tech theft, phishing emails, phone calls, text messages, or even through no fault of your own as the result of a corporate data breach, millions fall victim to identity theft every year.
  • Advance Fee Loan Scams– A perennial problem, advance fee loan scams prey on consumers and business owners who are struggling financially. Victims are told they qualify for large loans but must pay upfront fees-often more than a thousand dollars. The victim wires money to the scammers, but never receives the loan.
  • Over-Payment Scams– Over-payment scams typically target small business owners, landlords or people with rooms to rent and sellers on classifieds or sites like Craigslist. The scammers overpay the amount for the services or products and then ask the victim to wire the extra amount back to them or to another fraudulent entity. Ultimately though, the check is forged and the victim is out the money wired back to the scammers.

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