Is iRobot A Good Investment?

I bought iRobot at $30s and sold about half of the shares hold at over $100. I regret that I failed to sell them all. Even after iRobot’s dropping about 40% from the top, I am still hesitating whether to go back into the game with more investment because I am not sure whether the company can defend their leading position in the long term. It seems that many companies can make a robotic vacuum cleaner now.

Here is an excerpt from a brilliant article that Warren Buffett penned in Fortune in November 1999, “Mr. Buffett on the Stock Market:

All told, there appear to have been at least 2,000 car makes [operating at one time or another in the U.S.], in an industry that had an incredible impact on people’s lives. If you had foreseen in the early days of cars how this industry would develop, you would have said, “Here is the road to riches.” So what did we progress to by the 1990s? After corporate carnage that never let up, we came down to three U.S. car companies–themselves no lollapaloozas for investors. So here is an industry that had an enormous impact on America–and also an enormous impact, though not the anticipated one, on investors.

I won’t dwell on other glamorous businesses that dramatically changed our lives but concurrently failed to deliver rewards to U.S. investors: the manufacture of radios and televisions, for example. But I will draw a lesson from these businesses: The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.

With iRobot’s shares’ PE over 30, the risk is high even in the short term.

Seven insights from legendary investor Warren Buffett

Warren Buffett is one of the world’s greatest investors and business leaders. Over the years the man who famously made today’s equivalent of over $50,000 as a teenager has uttered some pretty prophetic statements.

1. “It is not necessary to do extraordinary things to get extraordinary results.”
Buffett suggests that the best successes in the workplace can come from those who are consistent. Flashy ideas and grandiose plans only take you so far. In the end, the results speak for themselves.

2. “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
Here, Buffett says that anyone’s reputation can quickly take a hit and to always act with integrity. Otherwise, a whole career can be ruined easily no matter the effort over the years.

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Human Weakness in Investment – Herd behaver

We almost cannot live without the Internet now. If you are not too young, you must remember the dot-com bubble in 1995–2001. Over the period, investors were crazy about companies in the Internet business and were ready to buy these companies at any prices. On the other hand, companies could cause their stock prices to increase by simply adding an “e-” prefix to their name or a “.com” suffix, which one author called “prefix investing”. By the end of the 1990s, the NASDAQ hit a price-to-earnings (P/E) ratio of 200. Many companies disappeared afterwards and many crazy investors, or rather speculators, in this dot-com rush lose their money.

How could this kind of crazy thing happen repeatedly in history? It’s herd behaver at work.

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Human weakness in investment –incapable of self-reflection

There is a saying that “love is blind”. This means a person in love would not be able to see any imperfection in the lover. This is maybe an extreme case. However, people do have the tendency of refusing to change their position when the relevant situation having been changed, or have bias on anything against whatever they initially believed in.

For example, a boy was brought to the same church by his parents frequently, he would not only mostly likely believe in the same religion when he grows up, but also strongly reject any other religion or atheism.

The same thing happens in stock market. When people, no difference being individual investors or institutional investors, already have a long position in the market, they tend to collect any relevant information, analyst it and present it in a way to justify that the market will go up further. The same kind of people also likely has a love affair with the company, of which they hold shares, and also with the relevant industry. They reject any information they don’t like, just like a person in love.

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Buy America & Avoid China

There will be an inevitable crash in the Chinese economy. China to exceed America in economic power under current totalitarian communist regime will only happen in the dream of ignorant people. I totally agree with Mr. Buffett that “America’s economic magic remains alive and well.” Buy America. Avoid China.

The following is another chance to learn from Mr. Buffett.

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Warren Buffett’s Advices

INVESTING

Don’t be too fixated on daily moves in the stock market: “Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.” (from letter published in 2014)

Don’t get excited about your investment gains when the market is climbing: “There’s no reason to do handsprings over 1995’s gains. This was a year in which any fool could make a bundle in the stock market. And we did.” (1996)

Don’t be distracted by macroeconomic forecasts: “The cemetery for seers has a huge section set aside for macro forecasters. We have in fact made few macro forecasts at Berkshire, and we have seldom seen others make them with sustained success.” (2004)

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My First Tenbagger

It was almost end of October, 2002, when I bought the book “One Up On Wall Street” and learned the term of “Tenbagger” which was created by Peter Lynch, the author of the book. I said to myself, “Woo, that’s wonderful.” And then forgot about it.

It was in March 2004, when I noticed a Singapore listed company named “Raffles LaSalle Limited” (The name was changed into “Raffles Education” later), which specialized in creative design education. The Company owned and operated a network of private technical schools that focuses on creative design like fashion, interior, graphic, product and multimedia design with supporting business administration and language classes. The Company had ten schools in Asia with six in China and one each in Singapore, Malaysia, Australia and Thailand. The Company also planned to double the number of schools it operates by 2006 with much of the expansion in China.

Its financial figures were perfect with growth of revenue at 56.7% in the latest half year report and profit growth at 139% respectively. Its ROE were over 40% with no debt. With such high growth, it even gave a dividend with 2% yield in the latest financial year! The operation cash flow was healthy and capital expenditure was about 20% of free cash flow. The stock is not cheap with PE around 50.

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Reflection on Buffett Way – Technology

I always regret that I did not buy Google Shares at its IPO, when it was about $85. It’s now $571, almost 7 times of the IPO price 8 years ago. I was using Google for searching all the time and believed that it dominated the searching business and was doing the right thing on almost all the aspects. The only reason I did not buy is because Warren Buffett doesn’t buy technology companies whose value are difficult to estimate. He also doesn’t invest at companies whose track record is not long enough and whose business not easy for him to understand. While I do understand Google‘s business at the time with my IT background, Google didn’t have much track record and the growth of it business was indeed hard to project. Therefore it’s difficult to estimate its value.

Indeed, it perfectly all right to miss the opportunity to buy Google at its IPO based on Buffett’s way. However, no investor should rule out technology companies from his investment portfolio in this era, because these are the companies which generate high returns and high growth year after year, such as IBM, Google, Apple, Oracle, Microsoft (though slower growth now for some of them) and so on. Certain type of IT business is not too difficult to understand, as the companies I mentioned here. The real challenge is the projection for future growth, which affects the valuation of the stock. Due to the quick change of technology landscape, it’s indeed not only difficult to predicate the growth of a company in this area, but also the success or failure of such company. A good example is Research in Motion which had a serial of very successful products, BlackBerry phones, until Apple’s iPhone came to the market. On the other hand, will Apple continue its success for long? It’s very hard to predict.

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Dolby is Back

Dolby surged 17% on the news of revived Windows 8 deal with Microsoft. It doesn’t really matter whether or when such deal happens. Dolby as a matter of fact, is providing the more effective and efficient solutions than its main competitor, DTS (“Dolby vs DTS Surround Sound”). When there are more devices on the move and more contents delivered via Internet or from the cloud, efficiency, which means delivering same high quality sound with less bandwidth, matters more. No matter what devices people are using, they surely want to hear high quality sound. Dolby is the obvious choice. It’s the user experience matters most in the entertainment industry. And Dolby just has the right product.

Besides the technical advantage on the efficiency, Dolby is also moving ahead at all fronts. Dolby wins naming rights to Hollywood icon only a few days earlier before the date they stroke the deal with Microsoft. Last month, Dolby Laboratories, Inc. (NYSE: DLB – News) and Royal Philips Electronics (NYSE: PHG; AEX: PHI) unveiled Dolby® 3D, a 3D HD format and suite of technologies designed to deliver full HD 3D content to 3D-enabled devices, including glasses-free displays. Dolby 3D is being demonstrated at the NAB Show® (April 16–19, 2012) at booth SU1212. Not to mention Dolby Atom, also announced last month by Dolby, is the most significant innovation in years and represents the future for entertainment sound in cinema.( “Dolby Atmos Is the Future of Entertainment Sound”)

I never doubted that Dolby is one of the ideal companies an investor can find in this world. (“Dolby Lab Is on Sale“) When Dolby’s share price dived last year, I bought more. I thought it will take longer time to bounce back. It now seems coming back beyond my expectation.

Infinera, the Jean Maker in Web Gold Rush

We all know the famous story of Levis Jeans. (http://inventors.about.com/od/sstartinventors/a/Levi_Strauss.htm) When the California gold rush was in full swing in 1853, Levi Strauss invented Jeans, which satisfied the demand of miners who wanted strong lasting pants.

Now, it’s the web gold rush. Companies (Apple, Microsoft, Amazon, Google, YouTube, Netflix and etc.) invested billions of dollars in smart phone, Internet TV, web games, cloud computing, video streaming and so on. All these businesses have to deliver their content or services via networks. Cisco predicts that the number of network-connected devices will be more than 15 billion, twice the world’s population, by 2015. In the fifth annual Cisco® Visual Networking Index (VNI) Forecast (2010-2015), the company also said the total amount of global Internet traffic will quadruple by 2015 and reach 966 exabytes per year. With this projection, the industry needs strong lasting networks, which mean scalable, liable and easy to manage networks.

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