INVESTING TIPS FOR RETIREES - THE BUFFET MODEL

As a rule, I’ve little interest in money matters. But these are not normal times, economically speaking. Ever since the financial tsunami hit Wall Street and toppled investment giants Bear Sterns, Lehman Brothers, Merrill Lynch, and left Goldman Sachs and Morgan Stanley quivering in the aftermath, I’ve been following every bit of media news on the ongoing financial meltdown. I’m awed and appalled at the same time by the astronomical figures that have been quoted in the massive rescue plan.


Try and digest this. Some top Wall Street executives are earning eight-figure salaries. This is 275 times that of the salary of the average worker in the US. There’s more. The US government is now asking Congress for US$700 billion to fix the financial mess. This is in addition to the US$85 billion to bail out AIG (parent company of AIA), and another US$54 billion pledged in aid to mortgage finance companies Fannie Mae and Freddie Mac. A mind-boggling, blood-chilling grand total of US$839 billion!


If this sum doesn’t leave you gasping for air, how about RM839,000,000,000? To me, such figures are obscene, especially when it’s the American tax-payers’ money that’s going to be used to clean up the mess caused by the recklessness of these companies.


So what has all this got to do with us here in Malaysia? Plenty. As they say, when the US sneezes, the rest of the world catches a cold. Our stock market is getting jittery. Retirees and pensioners are wondering whether to sell their shares, withdraw their insurance policies or just adopt a wait-and-pray policy. They simply cannot afford to see their retirement savings wiped out should a similar US-case scenario occur here.

Who can they turn to for some words of wisdom on what to do in such times of financial uncertainty? Can they trust the advice of their brokers, financial consultants and insurance agents? If they are looking for safe havens to park their hard-saved money and earn some decent interest, where should they look?


One person whose advice we can at least listen to, if not act on, is Warren Buffet, currently the world’s richest man AND philanthropist. He’s pledged to give away 85% of his wealth. No one can begrudge him his billions when he’s giving most of it away for good causes.

THE BUFFET MODEL OF INVESTING

Go through this checklist before you part with your money.

Is the company in an industry with good economics, rather than in an industry that competes on price?

Does the company have a consumer monopoly or brand name that commands loyalty?

Can any other company with an abundance of resources compete successfully with it?

Are the earnings on an upward trend with good and consistent margins?

Is the debt-to-equity ratio low or is the earnings-to-debt ratio high? This means that the company can repay its debt even in years when earnings are lower than average.

Does the company have a high and consistent return on invested capital?

Does the company retain earnings for growth?

Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments?

Is the company free to adjust prices for inflation?

At what price is the business a bargain? The answer is when it provides a higher rate of compounded return relative to other available investment opportunities.


Personally, what I’ve learned from friends and relatives who are serious investors (as opposed to speculators) is do your homework. One thing most of us have is time. Use it to learn all about smart investing. Find out as much as you can about the company that you are planning to invest in. Read their annual reports. Check their management track record. Pay the company a visit if you can. Do not follow the herd mentality.