Thursday, September 22, 2005

Warren Buffett platitudes 2 comments

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First of all, I have to say that I have tremendous respect for Warren Buffett and his abilities as an investor; in fact he was the first one I read about when I started out in investing. I am just going to point out certain of his well-quoted words of wisdom which I disagree with somewhat.

There is this analogy about Mr Market which I believe was first used by his sifu Benjamin Graham. Buffett says the investor can see the market as a temperamental individual (Mr Market) who is subject to mood swings and hence quotes wildly varying buy-sell prices at different times although company fundamentals might stay the same. This does give credence to the fact that market psychology plays a large part in stock valuations, but somehow lulls the starting investor into complacency about the market. As long as "fundamentals" remain the same, the newbie reasons, he should take advantage of "Mr Market" and the seemingly cheaply-quoted prices. I find that this is partly true but also quite often the fundamentals are priced into the stock already; Mr Market is not as irrational as he seems. So it is always prudent to question, before htting the Buy button, why Mr Market is offering that kind of bargain basement price; perhaps he is indeed irrational, but at least have that extra thinking process.

There is also this view expressed by the Sage that he doesn't really care if the stock market closes for ten,twenty years since it's the company that he watches, not the stock. Well it seems that if this happens the stocks won't be trading that the multiples that they are trading at in the market. Liquidity is the lifeblood of speculation; take it and speculation away and you lose probably half the PE. Look how lightly-traded stocks are valued at 5-6 times PE on the SGX.

Lastly for this article tonight, Buffett advises buy and hold but one should look in the context of his track record. He made his big money buying during the oil shock-triggered stagflationary years of the 1970s, and then holding during the longest bull market on record, the close to 20-year bull from the 1980s to the turn of the millenium, buoyed by fresh individual investor funds (retirement money) and a wave of optimism following the end of the Cold War. I think we'll have to wait a long time for this kind of event sequence to happen again; bulls and bears tend to be quite dynamic nowadays. By the way, Buffett himself showed quite a fair bit of market timing in selling out all his holdings and liquidating his managed fund before the 1970s bear market set in.

This has been so fun to write that I'll probably find some more material to write for another continuation article. Again, this is not Buffett-bashing; far from it. I wouldn't dare.




Anonymous Anonymous said...

Buffett actually had his highest returns when he was a more active trader during the Buffett Partnership days. The average annual return of the partnership (before his fees) were around 30% over the 12-year period. (Interestingly, Buffett' partnership was effectively a hedge fund in terms of its fee structure and investing activities.)

4/21/2007 2:29 AM  

Excellent post

1/14/2014 10:22 AM  

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