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How You Can Do Much Better Than Warren Buffet

Warren Buffett's Berkshire Hathaway company. If you'd invested in Berkshire in 1965, you would have made 1,900 times your money by now. Berkshire's stock investments comprise one of the best-known portfolios around. But its huge success has to do with more than just good timing. Unlike many investors who sweat over the precise timing of when to jump into a stock, Berkshire focuses on finding the right companies at the right price. The timing takes care of itself.

Look at the huge gains Berkshire made in so many companies (American Express and Moody's are two that made long, steep climbs while they were part of the Berkshire portfolio) and you'll instantly realize that it doesn't really matter that Berkshire could have done even better had it bought a particular stock two months earlier or two months later. You usually don't have to wait for the stock to bottom out - or to bottom out and begin to turn around - as long as you like the company's fundamentals, management, and growth plan. But there's one big exception to this rule. When a stock has taken a monumental dive - losing more than half its peak value - you need to approach it with extra caution. And you should wait for the stock price to turn back up before you take any action.

With companies that have had enormous drops, even this cautionary step is not enough. Such a dramatic fall signifies a serious problem. It could be an accounting scandal, a CEO on the take, diminishing revenues or profits, products with outdated technology, or just plain bad publicity. Even when you wait for a stock to go back up, it's possible that its rise could be based on temporary good news. If so, the stock's improvement could be temporary too. Getting back to Berkshire . Berkshire's portfolio of 33 stocks (worth $42.7 billion) was bought over a long period of time. It began buying shares of its "big four" companies - American Express, Coca-Cola, Gillette, and Wells Fargo - back in 1988. But a stock bought 10 or 15 years ago is ancient history.

And one purchased 1-2 years ago (again, think Google) might as well be ancient history. A big part of investing is choosing the right company at the right price point. The time to buy Google, for example, has come and gone. Last year, the right company. This year, the wrong company. Of those 33 stocks, five are relatively new investments: Home Depot (HD), Lexmark International (LXK), Tyco International (TYC), Anheuser-Busch (BUD), and Kingfisher (KGFHY). Please don't go rushing out to buy these companies. Only one of them is worth considering. (More on that in a second.) The Anheuser-Busch stock, for example, has shown surprising weakness since Berkshire bought it.

And there are problems with three others. Over the last 25 years, Berkshire's portfolio has lost money in just three stocks. In that span, it averaged an annual return of 20.3 percent compared to the S&P 500's average of 13.5 percent. But listing the remaining 27 stocks in the Berkshire portfolio isn't going to do you much good . except to satisfy a curiosity about which stocks are in this top-performing portfolio. None of these companies offer outsized returns sooner rather than later. The 20.3 percent annual return that the Berkshire portfolio has averaged is very impressive.

But for even better gains - much better gains - the way to play this game is as follows: * Look for new people and strong ideas. I just don't believe it when the old management team says they got religion and they can resurrect the company. * Make sure the company operates in an exciting market. A surging market helps upside. And it makes it easier for a company with something to offer to grab market share. * Uncover a potential for huge profit. An idea, product, technology, asset - the company should have SOMETHING up its sleeve that can pay off really big. Searching for companies outside of Berkshire's portfolio with the above three things in mind, I've come up with three probable lightning strikes. One company is a multi-billion-dollar technology firm in the making .


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