Friday, November 25, 2011

Holiday Special: 5 Warren Buffett Quotes To Make You A Better Investor

Now that the Thanksgiving holiday is right around the corner, I thought it would be a good time to kick back and take a look at some of Warren Buffett’s most thought-provoking quotes that can improve your life, financial and otherwise. Mr. Buffett has certainly given us lots of quotes to choose from—he has been writing Berkshire Hathaway’s (BRK.A) annual shareholder letter for over forty years, and almost every letter contains dozens of pieces of financial wisdom that can immediately make you a better investor upon application. I tried to pick my favorite Warren Buffett quotes that haven’t been repeated ad nauseam and have practical applications.

Without further ado:

One. "You only have to do a very few things right in your life so long as you don’t do too many things wrong."

Since it’s the holiday season, let’s focus on the first half of that quote. If you have a couple decades left in your investment life, imagine how much your future self would thank you if you dedicated a significant portion of your disposable income to get your hands on a block of shares in consumer staple stalwarts such as Johnson & Johnson (JNJ), PepsiCo (PEP), Coca-Cola (KO), Proctor & Gamble (PG), or Colgate-Palmolive (CL). Let’s say that over the next 2-3 years you put aside $12,400 to buy 200 shares of Johnson & Johnson. That would give you $456 in annual dividends to spend as you please—but here’s the fun part—if the company can raise its dividend by 8.25% annually for the next 20 years (it has raised it by 10.7% annually for the past twenty), then you will receive over $2,000 annually in dividends from Johnson & Johnson at that point, in addition to the growing dividends that you received along the way. If you could get in the habit of setting aside enough money to buy 100-200 shares of venerable American blue-chips each year such as those mentioned above, it’s easy to see how you could set put yourself on the path to coming out ahead of 99% of the rest of the population.

Two. "Risk is a part of God’s game, alike for men and nations."

One of the things I like about focusing on income and dividend growth is that it takes away some of the power that the stock market seems to lord over some people. If I buy 100 shares of Exxon Mobil (XOM), all I have to do is monitor the $188 in annual dividends by making judgments about the strength of Exxon’s earnings power and checking the payout ratio—since Exxon only pays out about a third of its earnings in the form of dividends, it seems to be a good risk-adjusted bet to assume that Exxon will continue to pay its dividend well into the future, most likely raising it along the way. With this type of mindset, it makes little difference whether the shares trade at $50 per share or $100 per share, and it then becomes possible to tune out the daily gyrations of CNBC hosts and Fox Business Channel pundits.

Three. "We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a 'romantic.'"

This is one of Buffett’s more risqué quotes, and it does a good job of calling to mind the difference between investors and day traders. Personally, I can’t relate to the day trader mentality—I couldn’t imagine staring at blips on a screen all day hoping they go up or down, and then getting really emotional about it. I think we should treat stock ownership for what it really is—a proportional share in the business. If you think McDonalds (MCD) is going to be selling more hamburgers, chicken nuggets, and Big Macs a decade from now (and earning much larger profits), then you should know full well what your ownership claim represents—an ownership stake in those profits, some of which will most likely be paid out to you in the form of quarterly dividends. As you buy more shares, your ownership stake increases—it’s as simple as that.

Four. "Our favorite holding period is forever."

Although no investor would be well served by holding a stock “no matter what”, I do think Buffett is on to something here that seems to fly in the face of how most people approach their holdings these days. In 1964, when shares of American Express (AXP) fell to $35 per share, Buffett started loading up, investing several hundred million dollars into the company—today, Berkshire Hathaway owns over 151 million shares of American Express. With Buffett’s biggest bets—Coca Cola (KO), Wells Fargo (WFC), Washington Post (WPC), and American Express—he loads up on shares when they are temporarily beaten down, and then holds them for the long haul, using the dividends produced to fund other investments.

Five. "I have no idea on timing. It’s easier to tell what will happen than when it will happen. I would say that what is going on in terms of trade policy is going to have very important consequences."

I like this quote a lot, and I think it’s particularly relevant in light of the recent dissolution of the Deficit Commission. Can you honestly imagine Warren Buffett sitting in Omaha waiting to hear about the deficit commission before making a decision? Of course, that would be ridiculous. We should get in the habit of identifying companies that we like with strong long-term prospects, and then buy when something irrationally depresses the prices. If you were planning on buy shares of Proctor & Gamble for $62, and the failure of the deficit commission pushes shares down to $61 amidst a broader market sell-off, then you should use the opportunity to load up on shares that are selling at a slightly better discount.

A lot of people lament falling stock prices. If you’re planning on selling shares in the near future, then that’s a perfectly understandable lamentation. But if you plan on being a net-purchaser of stocks in the foreseeable future, then falling stock prices should be your best friend since they enable you to buy an ownership claim of more future profits at a lower price. As long as the earnings aren’t impaired in any way, you should rejoice at falling prices—if Berkshire’s Class B shares (BRK.B) are going to earn $5 per share, why wouldn’t you rather pay $70 for each ownership claim instead of $85? If you adopt an ownership mentality and seek to buy the greatest amount of risk-adjusted future profits at the lowest price possible, then you’ll do fine. I hope you enjoyed these Warren Buffett quotes, and I hope you all have a great Thanksgiving Holiday and weekend.

Sunday, November 20, 2011

Different shapes of the candlesticks

Typical candlesticks & Marubozu
Doji
Hammer and Hanging Man & Shooting Star
High Wave & Engulfing Pattern
Dark Cloud Cover
Piercing Line
Harami
Morning and Evening Star and Abandoned Baby
Tweezers

Candlestick Pattern Dictionary

* Abandoned Baby: Abandoned Baby Candlestick example image from StockCharts.com A rare reversal pattern characterized by a gap followed by a Doji, which is then followed by another gap in the opposite direction. The shadows on the Doji must completely gap below or above the shadows of the first and third day.

* Dark Cloud Cover: Dark Cloud Cover Candlestick example image from StockCharts.com A bearish reversal pattern that continues the uptrend with a long white body. The next day opens at a new high then closes below the midpoint of the body of the first day.

* Doji: Doji Candlestick example image from StockCharts.com Doji form when a security's open and close are virtually equal. The length of the upper and lower shadows can vary, and the resulting candlestick looks like, either, a cross, inverted cross, or plus sign. Doji convey a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session, but close at or near the opening level.

* Downside Tasuki Gap: Downside Tasuki Gap Candlestick example image from StockCharts.com A continuation pattern with a long, black body followed by another black body that has gapped below the first one. The third day is white and opens within the body of the second day, then closes in the gap between the first two days, but does not close the gap.

* Dragonfly Doji: Dragonfly Doji Candlestick example image from StockCharts.com A Doji where the open and close price are at the high of the day. Like other Doji days, this one normally appears at market turning points.

* Engulfing Pattern: Engulfing Pattern Candlestick example image from StockCharts.com A reversal pattern that can be bearish or bullish, depending upon whether it appears at the end of an uptrend (bearish engulfing pattern) or a downtrend (bullish engulfing pattern). The first day is characterized by a small body, followed by a day whose body completely engulfs the previous day's body.

* Evening Doji Star: Evening Doji Star Candlestick example image from StockCharts.com A three day bearish reversal pattern similar to the Evening Star. The uptrend continues with a large white body. The next day opens higher, trades in a small range, then closes at its open (Doji). The next day closes below the midpoint of the body of the first day.

* Evening Star: Evening Star Candlestick example image from StockCharts.com A bearish reversal pattern that continues an uptrend with a long white body day followed by a gapped up small body day, then a down close with the close below the midpoint of the first day.

* Falling Three Methods: Falling Three Methods Candlestick example image from StockCharts.com A bearish continuation pattern. A long black body is followed by three small body days, each fully contained within the range of the high and low of the first day. The fifth day closes at a new low.

* Gravestone Doji: Gravestone Doji Candlestick example image from StockCharts.com A doji line that develops when the Doji is at, or very near, the low of the day.

* Hammer: Hammer Candlestick example image from StockCharts.com Hammer candlesticks form when a security moves significantly lower after the open, but rallies to close well above the intraday low. The resulting candlestick looks like a square lollipop with a long stick. If this candlestick forms during an advance, then it is called a Hanging Man.

* Hanging Man: Hanging Man Candlestick example image from StockCharts.com Hanging Man candlesticks form when a security moves significantly lower after the open, but rallies to close well above the intraday low. The resulting candlestick looks like a square lollipop with a long stick. If this candlestick forms during a decline, then it is called a Hammer.

* Harami: Harami Candlestick example image from StockCharts.com A two day pattern that has a small body day completely contained within the range of the previous body, and is the opposite color.

* Harami Cross: Harami Cross Candlestick example image from StockCharts.com A two day pattern similar to the Harami. The difference is that the last day is a Doji.

* Inverted Hammer: Inverted Hammer Candlestick example image from StockCharts.com A one day bullish reversal pattern. In a downtrend, the open is lower, then it trades higher, but closes near its open, therefore looking like an inverted lollipop.

* Long Day: Long Day Candlestick example image from StockCharts.com A long day represents a large price move from open to close, where the length of the candle body is long.

* Long-Legged Doji: Long-legged Doji Candlestick example image from StockCharts.com This candlestick has long upper and lower shadows with the Doji in the middle of the day's trading range, clearly reflecting the indecision of traders.

* Long Shadows: Long Shadows Long Shadows Candlestick example image from StockCharts.com Candlesticks with a long upper shadow and short lower shadow indicate that buyers dominated during the session and bid prices higher. Conversely, candlesticks with long lower shadows and short upper shadows indicate that sellers dominated during the session and drove prices lower.

* Marubozo: Marubozu Candlestick example image from StockCharts.com A candlestick with no shadow extending from the body at either the open, the close or at both. The name means close-cropped or close-cut in Japanese, though other interpretations refer to it as Bald or Shaven Head.

* Morning Doji Star: Morning Doji Star Candlestick example image from StockCharts.com A three day bullish reversal pattern that is very similar to the Morning Star. The first day is in a downtrend with a long black body. The next day opens lower with a Doji that has a small trading range. The last day closes above the midpoint of the first day.

* Morning Star: Morning Star Candlestick example image from StockCharts.com A three day bullish reversal pattern consisting of three candlesticks - a long-bodied black candle extending the current downtrend, a short middle candle that gapped down on the open, and a long-bodied white candle that gapped up on the open and closed above the midpoint of the body of the first day.

* Piercing Line: Piercing Line Candlestick example image from StockCharts.com A bullish two day reversal pattern. The first day, in a downtrend, is a long black day. The next day opens at a new low, then closes above the midpoint of the body of the first day.

* Rising Three Methods: Rising Three Methods Candlestick example image from StockCharts.com A bullish continuation pattern in which a long white body is followed by three small body days, each fully contained within the range of the high and low of the first day. The fifth day closes at a new high.

* Shooting Star: Shooting Star Candlestick example image from StockCharts.com A single day pattern that can appear in an uptrend. It opens higher, trades much higher, then closes near its open. It looks just like the Inverted Hammer except that it is bearish.

* Short Day: Short Day Candlestick example image from StockCharts.com A short day represents a small price move from open to close, where the length of the candle body is short.

* Spinning Top: Spinning Tops Candlestick example image from StockCharts.com Candlestick lines that have small bodies with upper and lower shadows that exceed the length of the body. Spinning tops signal indecision.

* Stars: Stars Candlestick example image from StockCharts.com A candlestick that gaps away from the previous candlestick is said to be in star position. Depending on the previous candlestick, the star position candlestick gaps up or down and appears isolated from previous price action.

* Stick Sandwich: Stick Sandwich Candlestick example image from StockCharts.com A bullish reversal pattern with two black bodies surrounding a white body. The closing prices of the two black bodies must be equal. A support prices is apparent and the opportunity for prices to reverse is quite good.

* Three Black Crows: Three Black Crows Candlestick example image from StockCharts.com A bearish reversal pattern consisting of three consecutive long black bodies where each day closes at or near its low and opens within the body of the previous day.

* Three White Soldiers: Three White Soldiers Candlestick example image from StockCharts.com A bullish reversal pattern consisting of three consecutive long white bodies. Each should open within the previous body and the close should be near the high of the day.

* Upside Gap Two Crows: Upside Gap Two Crows Candlestick example image from StockCharts.com A three day bearish pattern that only happens in an uptrend. The first day is a long white body followed by a gapped open with the small black body remaining gapped above the first day. The third day is also a black day whose body is larger than the second day and engulfs it. The close of the last day is still above the first long white day.

* Upside Tasuki Gap: Upside Tasuki Gap Candlestick example image from StockCharts.com A continuation pattern with a long white body followed by another white body that has gapped above the first one. The third day is black and opens within the body of the second day, then closes in the gap between the first two days, but does not close the gap.