Forum Archive Index - May 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi jerrold,

>
> 
>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.
>
>


Yes I think that is basically right.  Although you didn't mention 
that because of the increasing dividends he gets, Buffett also gains 
wealth via the increasing capital value of the asset that is 
producing his increasing dividends.  And the reinvestment of the 
income he doesn't get as dividends back into the business which 
compounds his returns in future 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)
> 
>


I'm not familiar with the intimate details of how Buffett got 
started.  But usually a partnership is just that.  You share your 
success with your partners.   Whether the original partnership was 
leveraged (used other peoples money at a fixed rate of interest), 
- that I couldn't tell you.


>
> 
> now imagine if Warren didn't use other people's money.  will
> fundamental investing do Mr Buffett any good?  
>
>


Clearly you can do better if you 'borrow to invest' and things go 
your way.  Of course, the downside of this is that if you get it 
wrong you will wipe out your capital faster.


>
>
> what chance do you
> have, as an individual, to get a good a result as mr buffett?  
> 
>


Let's say in your first year of working you were able to save 
$10,000.  Let's say you were able to save nothing more in your entire 
working life but managed to earned 15% every year (compounded) for 
the next 40 years on that $10,000.  You would then have $2.678m at 
retirement.  OK, that is not as good as Buffett but you could have 
quite a comfortable lifestyle on that amount of capital.


>
>
> 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 don't think fundamental investing is 'the only way to go'.  You 
could try and invent a computer software package so that 90% of the 
world's PCs need it to run if you like.  That has certainly worked 
for some.  You could find an oil well in your back yard (as long 
as you don't live in New Zealand where the government would claim 
it).  You could get your Dad to give you a few million for your 
21st birthday.  Good luck to you if you can do any of that!  

SNOOPY







---------------------------------
Message sent by Snoopy 
e-mail  tennyson@caverock.net.nz
on Pegasus Mail version 2.55
----------------------------------
"Stay on the upside of the downside, 
Anticipate the anticipation!"



----------------------------------------------------------------------------
To remove yourself from this list, please use the form at
http://www.sharechat.co.nz/chat/forum/