Forum Archive Index - May 2002

[jerrold poh <pohj@ihug.co.nz>]

i could be completely wrong here but ...

the way i see it, mr buffett is rich because:
a) he buys stocks with other people's money (OPM), and 
b) he also doesn't buy for the capital increase, but for the dividends.

that's why he only buys stock which have increasing growth, and won't
topple over in 10 years time.  

the reason for this is so his dividends increase each year.  think about
it.  if the sales increases 20% each year, you'll be getting 20% more
dividends each year. imagine if this happens every year for 10 years.

now think about real estate.


---- [ example ] ----

you buy a building worth 100k, but only use 10k of your own money, and
90k of OPM.  every year you have to pay interest, lets say 10%, but you
get rent, which is lets say, 10% aswell.  

rent = 10% of 100k = 10k
interest = 10% of 90k = 9k

earnings = rent - interest = 1k

this is pretty good in real estate, but just bare with me.  

your debt is still the same (you don't pay off your mortgage), but now,
your rent has increased 20%.

rent = 13% of 100k = 12k
interest = 10% of 90k = 9k

earnings = rent - interest = 3k.

---- [example ] ----


how does this apply to shares?  simple, this is what buffett did 
when he started out.

1) he started a partnership (well, lots of partnerships)
2) he got partners to sign up with him, and promised them a definate
return each year (interest)
3) he bought shares with the partnership's money (buying with OPM)
4) he paid the partners the promised return
5) he "kept" the profit which he didn't pay to the partners. (earnings)


now imagine if warrent didn't use other people's money.  will
fundamental investing do mr buffett any good?  what chance do you have,
as an individual, to get a good a result as mr buffett?  

and the big one, if fundamental investment is the way to go, how come
buffett is the only investor (be it fundamental or not) in the whole of
the american rich list?  how come they aren't more?

i'd be please to hear your comments.


jerrold.

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