Business: Warren Buffet supplies the basics to investing

By Jeff Lipsey

This week I decided to list some quotations from the billionaire Warren Buffet and comment on them. Quite possibly the most intelligent investor ever, Buffet has continued to give advice to all those willing to listen and is among the most respected and wealthiest people in the world.

I’ve often been asked if I am a day trader or a long-term investor.

Warren Buffet once said: “Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.”

I was once a victim of this temptation; eBay was going to announce its quarterly earnings, and after both Google and Yahoo posted positive earnings a few days earlier, I decided to take advantage of the situation. I bought some shares and I was right; eBay posted high quarterly earnings; however, the stock went down due to lower future forecasts. One week later, I am down five percent and decided to take the loss to find a better investment. Four months later, eBay is up more than 25 percent from that day, and I haven’t stopped kicking myself since. If only I knew these wise words in advance, I would have become a long-term investor sooner.

Another famous Buffet quotation seems all too simple: “never invest in a business you do not understand.” If there is an easier strategy to investing I have not found it. Don’t invest in the pharmaceutical industry if all you know is hamburgers; instead, invest in the fast food industry. Warren Buffet never owned stock in Microsoft, not because it wasn’t profitable, but because he never understood the technology. However, you don’t have to be an expert in the company to invest, but there is a difference between being an expert and having an understanding of the business.

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A unique quotation I found from Mr. Buffet deals with business schools: “To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets.” Basically, you don’t have to be a genius to invest in the stock market successfully, let alone have a finance degree. What Mr. Buffet is alluding to is, if you know how to value a company and what determines market prices, then that is enough to be a successful investor.

I will leave you this week with a final quotation from Mr. Buffet: “Risk comes from not knowing what you’re doing.” The main reason to diversify your portfolio is to reduce the idiosyncratic risk of you not knowing what you are doing. Therefore, know what you are doing when you invest and there will be no risk.

Stock pick of the week:

I have been tracking Corinthian Colleges (COCO), a for-profit educational corporation, for nearly two years now. Back in January 2004, COCO was trading at more than $35 per share. But following a couple lawsuits by former students, the share price had dropped to a low of $11. Corinthian Colleges, one of the largest post-secondary companies, has 66,000 students spread out over 94 colleges and 24 states.

Recently, COCO’s Board of Directors appointed a new director, with hopes of drastically shaking up a failing design. With a Price/Earnings Ratio of just more than 20, this company is still a good price. I am not going to downplay the risks, however. Corinthian Colleges still has several lawsuits against them that could potentially eat into earnings. But, with the addition of a new director, COCO has added initiatives that will hopefully increase earnings and share price. This stock is for the long-term investor, plan on holding it for a couple years to get the most value out of it. Current Price: $13.00.

Jeffrey Lipsey is a Senior in Business. His column appears on Thursdays. He can be reached at [email protected]