Adding Bond and S&P500 ETFs

I have been carry a large amount of cash waiting to purchase bonds.  I have decided to use half of this cash for bonds but to invest the other half in an S&P fund.  My decision was inspired by Warren Buffett, who disclosed how he advised his wife to invest.

  • Buy XUS @ $25.96
  • Buy XBB @ $30.60

Adding Berkshire Hathaway

I have decided to add Berkshire Hathaway (BRK-B) to my portfolio.  Berkshire does not meet my basic criteria, which demand a dividend of 2.5% or more (Berkshire pays none) but I admire the investment philosophy of Berkshire’s CEO, Warren Buffett.

Berkshire’s price has pulled back 5% from recent all-time highs of $118.94 to $112.48.

  • Buy BRK-B @ $112.48

How does Warren Buffett value an acquisition?

Warren Buffett just bid to take Heinz (HNZ) private for $72.50 per share.  Heinz’ shares jumped from $60 to $72.50.

Buffett is an acolyte of Benjamin Graham.  Graham set out seven criteria for how to value a stock based upon price, earnings, book value, current ratio, and growth.  His criteria are in the second column of this table.

Graham Heinz
Revenue $2B+ $11B OK
Current Ratio 2+ 1.2 ?
Earnings 10 years + Yes OK
Dividend 20 years + Yes OK
Growth 3%+ ~5% OK
P/E 15- 19 ?
P/B 1.5- 7 ?

So how does Heinz measure up?  Heinz’ measures are in the third column of the table, and Heinz falls short on three of Graham’s seven criteria: current ratio; P/E ratio; and P/B ratio.

The lesson must be that even Graham’s criteria are only broad guidelines for acquisition (or Buffett has made an error).

Getting into Microsoft and back into Intel

Back in May I identified Microsoft (MSFT) and Intel (INTC) as core positions.  I have been waiting for a pullback to get into these stocks.  Tech stocks are generally cyclical – peak in winter and trough in summer – and it looks like that pattern will hold true again this year.  Both are down since their recent highs and both fell around 3% today.  I have placed orders 10% below current market prices and I’ll wait for a bite.

  • BUY MSFT @ $26.75
  • BUY INTC @ $23.50


These orders were not executed as the price has remained too high.  Today, 23rd July, I have increased the bid prices.

  • BUY MSFT @ $28.55
  • BUY INTC @ $24.70


Today, 8th August, I updated these orders.

  • BUY INTC @ $25.90
  • BUY MSFT @ $29.60


Today, 23rd August, my Intel order was executed.  The price had fallen as Warren Buffett exited his Intel position.


Today, 10th September, the Microsoft order expired.  The price is simply too high for me.  I’ll wait to see how US markets perform in September (usually a bad month) before placing another order.


Today, 24th September, the Intel order looks like a bad call.  Intel opened today at $22.93, down 8%!!  Looks like it’s a bad idea to bet against Buffett.

Crisis? What Crisis? Part 2

A couple of weeks ago I wrote a post discussing the supposed crisis that was developing regarding the US Congress’ failure to agree to raise the debt ceiling. In summary I thought it was a political issue, not a financial issue, and I took advantage of a fearful market to sell some of my bond fund and buy the S&P500 fund.

With hindsight I see that my thinking was correct (the debt ceiling issue was resolved) but the decision was dead wrong. Since I wrote the post on 25th July the S&P (^GSPC) has fallen 12% from 1337 to 1172! The cause: a surprise downgrade of US debt by one of the ratings agencies (S&P), and concern over European debt.


The decision to sell the bond fund and buy the S&P fund might be my worst decision to date. The lesson: sometimes Warren Buffet’s maxim “Be fearful when others are greedy, and be greedy when others are fearful.” is not completely true!

On the bright side gold is up and the Sprott Physical Gold Trust (PHY-U.TO) is up 11% from the purchase price of $13.46 to $14.91.

Investment Policy

My investment policy is based upon the principles that Benjamin Graham expressed in his book The Intelligent Investor. My Investment Policy is:

(1) I am an investor. I buy assets that are well priced based upon their inherent value (e.g., their dividends and prospects for dividend growth, and their earnings and prospects for earnings growth).

(2) I will invest in stocks and bonds of well known companies only (no speculative companies, no real estate, no gold).

(3) I will keep between 25% and 75% of my portfolio’s value in stocks and between 25% and 75% in bonds, depending upon my assessment of the likely return from the stock market versus that from bonds at the time.

(4) I will buy or hold stocks based upon two selection criteria:

Dividend: the company must pay a dividend, the higher the better; and

Return on Investment: the company must be priced such that the likely annual return is above 10%, with a 10% margin of safety (using an IRR calculation).

These two criteria are mandatory, but I may apply additional criteria to screen and select stocks. For example, I will not consider a stock with a PE Ratio above 20 and I generally look for stocks with a PE Ratio of 17 or less. I also look at the PEG Ratio.

(5) I am not a speculator, meaning that I do not buy assets based solely upon recent price advances in the hope that I will find a greater fool to sell them to later.

(6) I will not invest on margin as this is speculation.

But, we remember that Graham said:

“We are thus led to the following logical if disconcerting conclusion: To enjoy a reasonable chance for continued better than average results, the investor must follow policies which are (1) inherently sound and promising, and (2) not popular on Wall Street.”.

So how is my policy different from those on Wall Street? Well, I have never worked on Wall Street, but I know that they have one fatal flaw: impatience. Investment banks and money managers have customers who crave continuous returns. This is especially true of publicly traded investment banks, who are beholden to analysts from other banks and to quarterly reports. Brokerages, who are paid by the trade, are also keen to have investors turn over their portfolios more than is necessary. I feel no such pressures. As another great investor, Warren Buffet, said:

“The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!'”

(7) I will be patient and will hold a good value stock or bond that has not yet paid off.

The Intelligent Investor

Benjamin Graham wrote The Intelligent Investor in 1949, and revised it every five years or so until his death in 1976. It’s widely considered to be the best book ever written on the subject of investing, and is beloved of Warren Buffet. That was good enough for me, so I bought a copy and took it with me on my Spring vacation. It was a revelation!

I’m an engineer. I was first turned on to engineering when my physics teachers introduced me to Sir Isaac Newton and his laws of mechanics. These laws made intuitive sense and gave me the power, through disciplined observation, measurement and calculation, to make successful predictions about how objects will perform in the physical universe. When we use Newton’s laws to build bridges or navigate space, it tends to work out. The Intelligent Investor now gives me that same feeling of intuitive sense and empowerment, but this time the laws apply to the financial universe. The most compelling idea for me is Graham’s definition of investment versus speculation. I had been speculating for a dozen years without knowing it!

But it’s not a simple thing.

“Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.” – Warren Buffet

We must take care to avoid being caught up in the “madness of men” – speculation – and stick to the fundamentals that Sir Isaac Newton momentarily forgot.