January 28, 2008 Investment Club News

Investors,

We bought another share of Berkshire Hathaway at $2,849 U.S., paying a commission of $9.99 divided by 16 investors. The commission cost each of you 62 cents Canadian, or roughly 49 cents U.S.

Thanks to everyone who has been sending cheques. Without them, we'd be unable to make purchases, and making purchases at low levels has related strongly to our market beating success. (Only members can send cheques, and we're not accepting new members)

Two things have worked in our favour to produce strong results:
1. We have been fortunate in our equity (stock) selections
2. Our investors have deposited money regularly--especially after the markets have been hammered.

When comparing our results with the S&P 500 index, we've soundly beaten it. When tracking it, the program we use compares how we would have done if we had put the same amount of money in the S&P 500 index, instead of in our investment club.

When doing such a comparison, we have clearly beaten the market.

What's more important, is that we have beaten the market more soundly than these results indicate, thanks to our investors' behaviours. You guys have been great at adding money when the markets have been hammered, or during low points, which has given us an even larger advantage over investing in a static investment portfolio that isn't added to aggressively when the markets have dropped.

Studies have shown that most investors actually underperform the funds that they're in (whether they're mutual funds or indexes). What the average investor tends to do is invest more money when the markets are becoming more expensive, and they typically seize up or withdraw funds when the markets have dropped.

John Bogle's studies suggest that the average investor sabotages himself/herself in this manner, and regardless of how their funds peform over time, they do far worse than their funds--thanks to their very human behaviour.

You guys are clearly not "average" investors.

Thanks to all of you, and especially to Rob McMath, Robyn Schilling, Patrick Green, Andy Donahue, Gerhard Hirsch and Les Ratkai. Your purchases were all made during times of economic duress, and our investors, as a group, have benefitted from the money that you've made available during low market times.

Les and Gerhard, you deposited funds when Bush announced the war with Iraq. At that point, in 2003, the markets were even lower than they currently are today. With your money, we were able to buy Berkshire Hathaway at $2,150 (currently trading 33% higher than that) and we were able to buy USG at $4.35, which we eventually sold at a 700% profit.

Robyn, you have slowly been pushing money in during the downturn, as did Rob McMath, when the U.S. dollar was at its weakest. Robyn and Rob, your proceeds went towards buying Anheuser Busch and Wal Mart, which earned us returns of roughly 55% and 20% respectively (We still own the WalMart shares, but we lost Anheuser Busch when Inbev took over the company)

Andy and Patrick, you have been the most recently aggressive during the market downturn of 2008. With your proceeds, we have been able to buy cheap shares of Pfizer, Berkshire Hathaway, United States Gypsum and the international stock index. Thank you!

Buying when people feel "good and confident" about the stock market is a fool's game. As Buffett says, "You pay a high price in the stock market for a cheery consensus."

Thankfully, you guys have been very astute, depositing aggressively when markets have declined.

In contrast, Bogle's studies suggest that most people only invest when the markets are "cheery".

And when were the "cheeriest times"? 1999-2000 was right up there. Bubble. A serious crash followed. Buying aggressively during those times, despite the great press about it, killed everyone who speculated/invested aggressively during this euphoric time. PE ratios were higher than 30, and for tech businesses, they even reached triple digits. A sure recipe for disaster--based on 200 years of financial history.

1926 to 1929 was probably the most euphoric time in history to invest. Then, investors ignored the prices they were paying for shares in public businesses. PE ratios, like they were in the late 1990s, were in the stratosphere.

The safest times to buy stocks have always been after major declines. The years 1973/74 were fabulous. PE ratios were in the single digits, and people buying then were handsomely rewarded. Of course, those buying during the depression also made a killing in the years that followed. Buying in 2001, after 9/11, or buying after the market plunge of 2003 was another gem-like opportunity to get aggressive.

Some people try holding back--speculating that the markets might drop further. History says that doesn't make sense. Only those with tremendous luck can "time" the bottom correctly, and most people who try it, miss out when they're caught (to use Charlie Munger's phrase) "thumb sucking". The markets rise, and they miss out on their opportunity.

The bottom line is that strong investors think like business people. They maximize long term returns by keeping speculation, fear and greed at bay. You have to ask yourself if buying businesses when the market's PE ratio is 10, is a good deal. Long term, over 200 years of market history, buying when PE ratios are at 10X earnings has always been a great long term move, regardless of where the markets go (short term) from that level.

Because the club is run like a mutual fund, on a unit system, we all benefit from deposits. However, those who personally make deposits benefit more, during low markets, than those whose accounts sit somewhat dormant. Depositers, in essence, are buying units at cheaper prices, which credit their individual accounts. And with their proceeds, the purchases we make benefit everyone.


Thanks,
Andrew

- Discount Brokerage


Sett Date
Qty
Description
Type/Price
Comm
Net Amt


Trade Date 26-Jan-2009


29-Jan-2009
1
BERKSHIRE HATHAWAY INC-BZR*6460
2,849.00
-$9.99
-$2,858.99

Rich on a Middle Class Salary--Published June 2006

This article was nominated for a Rogers National Publishing Award. It was my second article to be nominated for such an award, but unfortunately, neither nominees took home the hardware. The title of the article was selected by the magazine--to catch readers' attention.
It describes a bit of my story.
Please come back to my blog and add a comment. Thanks.

"World's Greatest Investor Tells All" Investing Like Warren Buffett--follow up article

I wrote this article for MoneySense, two and a half years after my first Buffett article. I expanded on some of the ideas in the previous piece, taking into account Lawrence Cunningham's excellent compilation of Berkshire Hathaway shareholder letters. The success of our Investment Club can very much be attributed to the philosophy outlined here.
Please come back to my blog to leave a comment. Thanks.

Invest Like Warren Buffett--published article 1

Invest Like Warren Buffett
From the January 2003 issue of MoneySense Magazine

I wrote this article for MoneySense magazine to describle how Mary Buffett/David Clarke, and Timothy Vick describe how Buffett invests, in their respective books, Buffettology and How to Pick Stocks Like Warren Buffett.

Please come back to my blog to leave a comment. Thanks.

Investment Club Annual Summary

Investors:

I hope you all had a great holiday. I figured we’d wrap up the year with a performance summary in U.S. dollars, and then disclose what purchases we have recently made.

In short, we had an aberrational year. We've beaten the S&P 500 index now for six straight years, but 2008 was highly unusual. According to yesterday’s Wall Street Journal, the 2008 best performing diversified U.S. stock funds with assets exceeding $1 billion were the American Century Equity Income and the Parnassus Equity Income fund. For the year, they are down 20.1% and down 23% respectively.

In U.S. dollars, our account dropped 18.8% for the year. If the Wall Street Journal is correct we have beaten every large diversified fund in the U.S. during 2008.

A tremendous amount of luck went into this performance. We beat the International index by 32.4%, the Vanguard S&P 500 index by 19.1%, the emerging markets index by 36.5%, the small cap index by 18.7%, the mid cap index by 23.6% and the Industrials index by 22.1%
*(using prices from market close for 01/05/2009)

IRR
PortfolioValue
Maniacle Members of the Mausoleum
-18.8%
266,074.86
Vanguard Int'l Equity Index - Europe (VEURX)
-51.2%
167,868.10

IRR
PortfolioValue
Maniacle Members of the Mausoleum
-18.8%
266,074.86
Vanguard 500 Index Fund (VFINX)
-37.9%
208,367.58



IRR
PortfolioValue
Maniacle Members of the Mausoleum
-18.8%
266,074.86
Vanguard Emerging Markets Index Fund (VEIEX)
-55.3%
155,325.64


IRR
PortfolioValue
Maniacle Members of the Mausoleum
-18.8%
266,074.86
Vanguard Small Cap Index Fund (NAESX)
-37.5%
209,402.45


IRR
PortfolioValue
Maniacle Members of the Mausoleum
-18.8%
266,074.86
Vanguard Mid-Cap Index Fund (VIMSX)
-42.4%
194,654.39


IRR
PortfolioValue
Maniacle Members of the Mausoleum
-18.8%
266,074.86
VANGUARD INDUSTRIALS INDEX FD (VINAX)
-40.9%
199,223.17

In Canadian dollar terms (the above performances are in U.S. dollars) we have gained roughly 4% this year. I haven’t confirmed this, but I believe that, in Canadian dollars, we have beaten every diversified Canadian equity mutual fund as well, during 2008.

This kind of performance, of course, requires a lot more luck than skill. We didn’t do anything stupid, and we had a lot of luck along the way.

Notably, our Anheuser Busch sale to Inbev made us plenty. We couldn’t have seen this coming, but we made plenty of money off the deal. We also had a high percentage of our portfolio in WalMart, which may have been the best performing blue chip stock on the New York Stock Exchange this year. Our Coca cola and our Simpson Manufacturing shares also held their own this year. I was frustrated that they didn’t drop, but at least their stubbornness to fall gave us a (meaningless in the long term) feather in our cap when it comes to bragging rights.

Ironically, having a healthy portion of the international index dragged our performance down somewhat this year. But overall, we’re very happy that it’s down. This lead me to place a new order for some more shares of the Vanguard first world international exchange traded fund this morning.

This morning’s new orders

This morning, I placed the following new orders: 1 share of Berkshire Hathaway, 100 shares of Pfizer, 75 shares of the VEA index and 300 new shares of USG. United States Gypsum is still low in price, but since our last purchase it has risen 48%--which is a bit of pain. That said, it is still very cheap.

Given the low commission fee that we pay, the 4 equity orders above will cost a grand total of $40 Canadian, or $1.90 per person.

Thanks,
Andrew