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"I like buying (shares) as (the stock market) goes down, and the more it goes down, the more I like to buy ... I don't know how to tell what the market's going to do. I do know how to pick out reasonable businesses to own over a long period of time," Buffet says.

"With a wonderful business, you can figure out what will happen; you can't figure out when it will happen. You don't want to focus on when, you want to focus on what. If you're right about what, you don't have to worry about when."

In Berkshire Hathaway's 2013 Annual Report, Buffet suggests some fundamentals of investing.

» When promised quick profits, respond with a quick "no";

» Focus on the future productivity of the asset you are considering;

» If you instead focus on the prospective price change of a contemplated purchase, you are speculating; and

» That a given asset has appreciated in the recent past is never a reason to buy it.

Sometimes, "a great investment opportunity occurs when a marvellous business encounters a one-time huge, but solvable, problem," he suggests. This "marvellous business opportunity" was American Express (Amex).

In 1963, a "salad oil scandal" triggered panic selling in Amex shares, causing its price to plunge by 50% to US$35 per share. A vegetable oil company had secured huge loans from an Amex subsidiary by using falsified documents, a debacle that cost the credit card company about US$58 million.

To determine whether the imbroglio would prompt Amex cardholders to stop using their credit card, Buffet spent the evening with the cashier at Ross' Steak House in Omaha, his hometown. Realising diners weren't bothered by the impropriety, Buffet bought 5% of Amex for US$13 million.

Berkshire Hathaway's 2013 Annual Report shows it currently owns 151.6 million Amex shares purchased at a cost of nearly US$1.3 billion against a market value of US$13.76 billion.

Another example of contrarian investing is Berkshire's purchase of a railroad company called Burlington Northern Santa Fe (BNSF) in 2009 amid the recent recession. Buffet said buying America's second-largest railroad company was an "all-in-wager on the economic future of the United States."

Buffet's reasoning was simple. As the US economy revived, so would demand for goods to be shipped by train. Furthermore, railroads are a more fuel efficient form of transport than trucks.

Buffet's analysis has been validated. Five years after buying BNSF, the railroad is now Berkshire's single-biggest profit driver, contributing US$1.65 billion in pre-tax profits in the third quarter last year.

Like all investors, Buffet has made major investment mistakes. However, these missteps haven't had a catastrophic impact on Berkshire's entire portfolio.

Ironically, one big mistake was buying a controlling stake in Berkshire, then a struggling textile mill, so that Buffet could fire the then CEO who had tried to undercut an offer the Sage of Omaha had made to sell his initial stake in Berkshire.

"And for 20 years, I fought the textile business before I gave up. If instead of putting that money into the textile business originally, we just started out with the insurance company, Berkshire would be worth twice as much as it is now," Buffet said.

Another miscalculation was acquiring a stake in Tesco. In 2006, when Buffet first started accumulating Tesco shares, the UK's leading supermarket chain was expanding worldwide, including into the US where it opened new stores called "Fresh and Easy".

Although Tesco issued a profit warning in 2012 and investors were abandoning the stock, Buffet remained unfazed and continued buying more shares.

Last year, Tesco admitted it had overstated its profits by £263 million, UK regulators began a full-scale investigation and eight top executives were suspended. Only then did Buffet concede he had been wrong about Tesco.

Nonetheless, for those who are discerning and bold, severe downturns in the stock market offer singular buying opportunities.

"A climate of fear is your friend when investing; a euphoric world is your enemy," Buffet says in Berkshire's latest annual report.

source : http://www.thesundaily.my/node/292774

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