Turning $10,000 into $11m

Is that sustainable? I’d be crazy to tell you it was, since that kind of return is in the Warren Buffet league, not the stock investor blogger league. Then again, this blog is about studying the habits of Buffet, the ultimate value investor. If you had invested $10,000 with Berkshire Hathaway in 1965, you would now have $30m.

There is only one way to invest if you’re a fan of Warren Buffet, and that is in value. That is what Moat Investor is all about – studying the art of finding great companies, buying their stock below market value, holding them for the long haul but also knowing when to cut bait.

The problem I’ve found is that finding great stocks when you are an amateur is pretty hard to do. I never have enough time to do the research that I want to do. I started this blog as a way to share that research, but it has been slow coming. It’s easy enough to find great companies. As we round out the articles in our investing course, we’ll be talking about how to find great companies. We’ll also share our research with you so you can add to your own watch lists. It’s a little bit harder to determine what the fair value of a stock is. Would you have predicted the incredible growth MasterCard (MA) has seen this year? We did, but only with a lot of research and some experience working in the payments industry. The hardest part of all is to estimate the sustainability of a company’s success – their moat. That is what we’re really looking for here, companies with big moats.

Unfortunately, companies with big moats are often priced at or above their actual value and little money can be made there, at least with some safety. And if a company doesn’t have a moat, you might be buying into a death spiral when the stock plunges far enough to give you a margin of safety.

Still, even though I spend only a few hours each week researching stocks, I’ve been able to find several companies worth investing in for my watch list. It’s worth the time in study because value investing is one of the few keys to building real life-changing wealth. Every investor should think like a Moat Investor. Charlie Munger, Warren Buffet’s partner, says, “All intelligent investing is value investing.”

What’s Behind Moat Investor’s 35%Annualized Return?

Here is a list of the returns since January 3 for the Moat Investor Watch List. I’ve taken out the stock names – you’ll have to subscribe to our free feed to get the watch list for yourself, more on that below.

1. -9.30%
2. 15.50%
3. 74.61%
4. 1.07%
5. -3.85%
6. -0.68%
7. -5.50%
8. 9.09%
9. 10.30%
10. -2.31%
11. -1.70%
12. 11.43%
13. -3.69%
14. 12.30%
15. -1.85%
16. 3.28%
17. 0.85%
18. 21.92%

Total return for six months: 17.8%

You can see that not every stock has gained. But the gains far outpaced the losses because of the margin of safety we’re looking for. Further, you need to get that watch list today because as you can see, there are still some stocks that haven’t hit their gains yet and might represent great opportunities for you.

How should you pick your own watch list?

Pick Great Companies. What are the companies you love? What are the companies that have no other substitutes for the money you spend? Phil Town reminds us that we own companies, not stocks. When you buy “stock,” you’re focus becomes that of a novice or a day-trader. You want to be a business owner of a company that you love with a strong moat. If you were going to buy a company, you would want dependable sales and financial performance. You would want to see a smart, ethical management team. You would want to have a passion and understanding of what they do. It’s no different when you invest.

Understand What the Company is Really Worth. The stock price is only what you pay today. The market is emotional and responds to a lot of data that has nothing to do with a company’s real value. That gives you an opportunity to buy companies at steep discounts. Value is easy to understand when you look at cash flow and return on equity.

Buy When the Market Says Sell. The market is dominated by the big guys – institutional investors, mutual funds, pension funds, etc. They have to be very short term focused because of the pressure to keep up their quarterly returns for fickle 401k consumers who will move their money out in a flash. They can’t afford to be patient. They will leave a company because of one or two missed estimates, regardless of the long-term growth potential the company shows. Patience and a refusal to get wrapped up in the emotions of Wall Street will get you to stocks that are 50% off their fair price or more. I don’t know about you, but I’ll buy a dollar for fifty-cents any chance I get.

Don’t Lose Money. Certainly, when a great company experiences a drop in their stock price, it is time to shift into action. But that action should be heavy reading and research, not purchasing. Only purchase the stock when you are sure that the stock price has dropped because of temporary factors, not because there is a fundamental change in their moat from which they may never recover.

Get The Moat Investor Watch List

I’m always on the lookout for good value companies. I’m not perfect, but I’m also willing to share my mistakes here online with you. I’m constantly looking for great companies who have fallen out of favor of Wall Street that represent great buys. You can read about my methodology here online.

Once I’ve found a great company and determined their fair market value, I keep them on the watch list and wait patiently for an opportunity to buy. Then I have to wait patiently again, as that stock may continue to falter for awhile until the market wakes up to it’s real value. Then, look out. MasterCard is up 77% since January 3.

So, how do you get our watch list? Simply subscribe with Feedburner. The link is also in the right-hand column. It’s free, there is no catch. When you subscribe to the feed, you will see a link for our watch list that is only contained in the feed’s footer, not anywhere else on this site. Of course, I’ll be sprinkling in analysis from the watch list with other analysis here online – just another great reason to subscribe so that you don’t miss an article. Timing is everything in value investing.

Moat Investor doesn’t follow gold and precious metals, so this is a good source for you to add to your reading list.

Pamela and Mary Anne Aden, noted investment analysts and editors of The Aden Forecast, explained why gold remains in a strong bull market in a June 15 commentary entitled, “A Unique Era.” After reviewing gold’s past performance (up 158% in the last six years), the Adens wrote: “We continue to believe that gold will likely rise for years to come, eventually reaching at least $2,000 and it’ll probably go even higher… Essentially, the perfect storm is gathering. That’s the big picture and it’s by far the most important. If you understand this and invest based on what’s happening, we feel strongly that you’ll continue to be well rewarded in the years ahead.”

It’s free and there’s no spam, so if you don’t sign up you’re shortchanging yourself. Check out the following:

What does Russo want in a global value investment?

Tyco is a ginormous conglomerate with it’s hands in everything from fire extinguishers and security to health care to electronics to sprinkler and valve fittings. Tyco is splitting into three businesses in an effort to pump up falling share prices. It’s a case of the parts being worth more than the whole. And it doesn’t hurt that Dennis Kozlowski is behind bars.

Spinoffs are a common strategy of late and many investors salivate at the opportunity to buy into a leaner, meaner company early on. In 2006 $54.5 billion worth of business units were broken out of their parents as new companies, spinoffs, carve-outs, or other strategies. A spinoff is defined as a company completely divesting itself of a business unit. A carve-out is when the parent company keeps most of the unit but sells off smaller pieces that don’t match the core strategy of the business unit. Ameriprise — Buffet has cut his holding of Ameriprise by more than a third, by the way — is a spinoff of American Express. Chipotle from McDonald’s. Tim Hortons — which the Canadians are bananas over — from Wendy’s.

Why are investors excited? The market generally rewards a good spinoff. According to USA Today, the spinoffs and carve-outs over the last 12 months have gained over 15% on average since their divestitures. The Standard & Poor’s 500 during the same time periods gained just 5.9%.

Investors haven’t reacted so well to the Tyco spinoffs. The stock has plummeted. That usually perks up Moat Investors’ ears, but Tyco probably has more to lose. Sluggish and unpredictable sales cloud Tyco. Tyco cut its fiscal first-quarter estimate by about 7%, due to weakness in some of its businesses. There isn’t a big or long-term win here. That happened back in July of 2002 when Ed Breen was named CEO. Tyco is up over 160% from that period.

Tyco and Tyco spinoffs are not a Moat Investor play.

 As Fat Pitch Financials said in a recent post:

Many investors, including several prominent value investors, had been waiting for this spinoff opportunity for quite some time.  But as you can imagine, if everyone was waiting for this opportunity, the likelihood of the market mispricing these stocks was slim to none. 

Fat Pitch goes on to give their analysis of how to consider the value of a spinoff, or at least the Tyco spinoffs. It’s a worthy read that details their process:

• Review of the presentations given at the June 19th Tyco Investor Meeting (which he found on the Google cache since Tyco pulled them from their site — good trick)
• Evaluation of Tyco Electronics likely small moat due to competitive pressures
• Evaluation of Covidien, a medical device manufacturer with some moat — trading above instrinsic value
• Evaluation of the parent company with strong brands, good moat, high switching costs but currently valued well beyond a margin of safety.

I’ll pass on this one. Not that there may not be some value there some day. Certainly Tyco International has strong brands and a repaire reputation. But there are better stocks right now. Can you say Panera (PNRA)?

Apple grew 450% since 2003. In that same period Microsoft grew 40% and Google grew 350%.

Apple has five huge product launches on deck including a new operating system, an Apple TV, a fully-fledged video iPod and of course, the much anticipated iPhone. Other companies would kill to have the potential growth from any single one of those products.

Apple has 85% of the download music market — a cosiderable moat created by a great user experience and huge brand leverage. Couldn’t they see 20% growth in each of those new products? Maybe a lot more.

This stock could be severely undervalued if someone can get to the bottom of the real future growth — and we’re going to try to give that to you.

1. Don’t panic. Moat Investors take the long view of value. That’s why you waited for a margin of safety.

2. Spend extra time with your watch list. You can subscribe to our feedburner feed and get a link to download our watch list if you’re curious. Some of your watched stocks might now have the marfin of safety you seek.

3. Check your fubdamentals. If you’re invested in a stock that is falling, check to see if something has changed that would cause you to dump it, or is it just part of a short-term trend. Look at insider trading, management changes, changes in strategy, etc.

Likely you’ll find that plunges are not reason to panic but opportunities to find great bargains.

There are some good speakers on the list, including Whitney Tilson and Robert Hagstrom of Legg Mason. It’s in Hollywood, and I know some of you are in Los Angeles, so check it out.

What do I have to do to get the watch list? Do I have to link to you? Do I have to comment? Do I have to climb to the top of a tall mountain and scream “I love you, Moat Investor?”

Nope. Although any of those things would be nice if you feel compelled to do them.

Just subscribe to our feed. Subscription is free and easy. If you’ve never done it before, Feedburner will walk you through the process. Click on the “Subscribe” links in the right column and you’ll be on your way to the link to the watch list.

Or click here.

What are you waiting for. It’s free. The Watch List has real value stocks with great ROIC, great sales growth, great EPS growth and other strong fundamentals.

Subscribe now.

Now, I have nothing against diversification, per se, especially if you do not want to take the time to learn Moat Investing. But just be prepared to watch them gimp along as my 401k did for years with returns in the single digits. Sure, diversification is the right strategy if you want to go on auto-pilot and let someone else determine your fate. But if youre willing to put in the time researching the right companies, you will do much better investing on your own than you will plopping your money into a mutual fund.

You must, I believe, set your own investment goals. You need something to return to when you’re spending extra hours researching stocks and before you’ve made your first exciting gains. Here are some typical goals that many Moat Investors are working toward:

• Retirement
• College savings
• Getting out of debt
• Buying a house or vacation property
• Charity (Buffet has so much money he has to give it away)

Well take a look at retirement as an example, because it is (or should be) common to everyone who isn’t already extremely wealthy.

Step 1: What is the return you are seeking?
Moat Investors should plot out goals for the following returns: 10%, 15%, 20% and 25%. Is this achievable? Thats the subject of another article, but yes, absolutely. My personal bottom line (floor) goal is 15% and I’m tracking for consistent performance toward that goal. But if you want to be more conservative, use 10%. But don’t forget the higher numbers either. There are plenty of wealth managers making much more than that using the same tools and philosophies of Moat Investing not the least of whom is Warren Buffet.

Berkshire Hathaway has returned an annualized 24%. Now, Buffet is a genius and I am not a genius, so I’m aiming for a little more than half of his return. Buffet also has a problem that you and I dont have. Berkshire is huge and moving that amount of money around is difficult. Unless you already have $5m in the bank, you wont have that problem. And if you do have $5m in the bank, what are you doing reading this, go out and spend some more time with your kids.

Step 2: How much time do you have?
This part is straight forward. Using retirement as an example, subtract your current age from your desired retirement age. You will come up with a negative number because we all wish we were already retired, so now, inject some reality into the equation. People often use 60 as the age of retirement, but lets say you’re 35 years old and you want to push it a bit and retire at 55. You have 20 years to achieve your retirement goal.

Step 3: How much do you need?
This part is hard, but here is my method. Think about what you need to live comfortably now and multiply it by 12.5. Why 12.5? Because if you have a pile of dough from all of your active Moat Investing and you don’t want to spend all that time researching stocks anymore, you could just pop it into a corporate bond at 8% or the net equivalent tax-free muni at 5% and live off of that forever. One divided by 8% is 12.5. If you need $100,000 to live comfortably now, you want to amass $1,250,000. But wait, what about CPI? What about the fact that Ill be spending less because I’ll own my house and my kids will be grown? If you really want to be picky, factor those things in. I think they’re pretty much a wash unless you’re 12 years old and then 2% per year inflation could make a difference in the milk money.

Step 4: How much do you need to invest?
You’ll need a good financial calculator for this step, but heres a sample scenario. Lets say you’re 35, you want to retire in 20 years with $1,250,000 in the bank. And you’re starting with no savings today (because you only stumbled upon this site just this instant, for which you will thank Google forever and ever).

• At 10% you will need to invest $1,650 per month
• At 15% you will need to invest $835 per month
• At 20% you will need to invest $401 per month
• At Warren Buffets 24% you will need to invest $218 per month

The moral of the story? Its a lot easier to get to your goal if you’re a genius like Warren Buffet. But, you say, I’m not a genius. Neither am I but I’m trending 15% and I think Im getting better every day I do it. Still, at 15% you will need to find an extra $835 per month which is no easy task. Thats roughly 10,000 more a year. Cut the lattes, get a raise, pick up a part-time or passive income source or find a new job altogether. Its not inconceivable.

But my mutual fund advisor tells me these returns are impossible? They are impossible for mutual funds. But not for the individual Moat Investor. I’ll go into this later in more detail, but mutual funds cannot possibly make the kind of money that you can as an individual. I’ll give you one example. Lets say you run a multi-billion dollar mutual fund and you want to sell $100m worth of a company. You would flood the market with shares and your investment would dwindle even further. So mutual fund managers are stuck through down-turns because they cannot move their money out like you can.

Step 4b: Adjust your time line.
Maybe you’re not willing to get another income source or ask for a raise. You can always stretch your time lines out. Look what happens if our retirement investor, still 35, decides to retire at 65 instead of 55 and picks up the additional 10 years of compound earning:

• At 10% you will need to invest $553 per month
• At 15% you will need to invest $180 per month
  At 20% you will need to invest $54 per month
• At 24% you will need to invest $20 per month

Surely you could find $180 per month, or a mere $2,160 a year to invest. Right? Its about six bucks per day. Could you cut out the lattes, the burgers, the NetFlix? Could you walk to work or get a more fuel efficient car? Come on, you can find six bucks in a day.

Or, better yet, read Moat Investor every week, study up, learn your companies and shoot for the 24% return where you only need $20 per month.

Step 5: Don’t stop with just one.
Don’t stop with a single investment goal. Once you have your retirement locked in, open up a college trading account. Start looking at vacation properties you’ll want to buy when you retire and have all that time and all that money to spend.

Then I began, as I always do when I have cash sitting in my account, looking at my watch list. Note: these are not to be construed as picks or suggestions, these are simply a small sample of the stocks I’m tracking and researching right now. Look what happened to the stocks on the list:

PNRA -2.23
GTRC -2.56
MA -1.06
CHS -0.50
INFY -3.70
WIT -1.04
WFMI -2.30
RRGB -1.13
JOSB -1.54
BBBY -1.85
LOW -1.08
FDS -2.06
BEBE -0.79
FAST -1.24
URBN -1.13
ANF -2.35
CKR -0.83
APOL -0.92

My first thought was, “yippee, maybe it’ll soon be time to get back into Guitar Center or MasterCard.” Then I started seeing a pattern emerge. As the day went on, all of my watch list stocks had dropped. A lot. Plummeted is a more accurate word.

It turned into a market-wide sell-off that has wiped out the gains of the entire year. But I’ve got no worries. Why? Because as the panicky investors move their money into the bond market, we’ll be given a feast of value opportunities in the coming month. And, oh yeah, the tools told me to get out and so I made a small profit instead of taking a beating today.