Category Archives: Investment philosophy

Don’t look at the ticker

This paragraph  in “How Buffett Does It” by James Pardoe is worth noting: “Warren Buffett, the classic value investor, simply does not care what happens to price deviations in the short run. If one owns shares in great businesses, then the short term doesn’t matter, and the long term will take care of itself. The only exception to this rule is if prices drop significantly, offering Buffett a chance to buy more shares at the depressed levels. When stocks go on sale, Buffett is interested.”

James Pardoe went on to advise: “Instead of focusing on the price movements of his stock, an investor’s time would be better served by monitoring the performance of the business: its management, earnings, cash flow, future prospects, and so on.”

 

Recommended reading:
How Buffett Does It: 24 Simple Investing Strategies from the World’s Greatest Value Investor (Mighty Managers Series)

Be fearful when others are greedy, and be greedy when others are fearful

Warren Buffett has oft been quoted as saying: “Be fearful when others are greedy, and be greedy when others are fearful.”

In his annual letter for Year 2006 to Berkshire Hathaway shareholders on Feb 28, 2007, Mr Buffett said in a comment on super-cat (super-catastrophy) insurance: “…Rates have recently fallen because a flood of capital has entered the super-cat field. We have therefore sharply reduced our wind exposures.”

But to make clear his stand, Mr Buffett said: “Don’t think, however, that we have lost our taste for risk. We remain prepared to lose $6 billion in a single event, if we had been paid appropriately for assuming that risk. We are not willing, though, to take on even very small exposures at prices that don’t reflect our evaluation of loss probabilities. Appropriate prices don’t guarantee profits in any given year, but inappropriate prices most certainly guarantee eventual losses.”

Explaining why Berkshire Hathaway had then sharply reduced its wind exposures, Mr Buffett said: “Our behavior here parallels that which we employ in financial markets: Be fearful when others are greedy, and be greedy when others are fearful.”

Another occasion when he used the “greedy” quote was in his letter (February 28, 2005) for Year 2004 when, among other things, he said: “Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous.”

Explaining the three primary causes, Mr Buffett said: “…first, high costs, usually because investors traded excessively or spent far too much on investment management; second, portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to the market marked by untimely entries (after an advance has been long underway) and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”

This “Be fearful when others are greedy, and be greedy when others are fearful” investment philosophy could be a factor explaining Berkshire Hathaway’s  third-quarter investment in 2011.

A Bloomberg report (Buffett Broadens Portfolio by Spending $23.9 Billion in Quarter) dated Nov 7, 2011, said that Warren Buffett’s Berkshire Hathaway Inc invested US$23.9 billion in the third-quarter, the most in at least 15 years, as he accelerated stock purchases and broadened the portfolio beyond consumer and financial-company holdings.

“Buffett, 81, drew down Berkshire’s cash as Europe’s debt crisis and Standard & Poor’s downgrade of the US pushed stocks to their worst quarterly performance since 2008. The investments disclosed Nov 4 include $6.9 billion of equities, $5 billion for preferred shares and warrants in Bank of America Corp and the acquisition of Lubrizol Corp for about $9 billion,” the report said.

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013

Fear is the foe of the faddist, but the friend of the fundamentalist

A Bloomberg report (Buffett Broadens Portfolio by Spending $23.9 Billion in Quarter) dated Nov 7, 2011, said that Warren Buffett’s Berkshire Hathaway Inc invested US$23.9 billion in the third-quarter, the most in at least 15 years, as he accelerated stock purchases and broadened the portfolio beyond consumer and financial-company holdings.

“Buffett, 81, drew down Berkshire’s cash as Europe’s debt crisis and Standard & Poor’s downgrade of the US pushed stocks to their worst quarterly performance since 2008. The investments disclosed Nov 4 include $6.9 billion of equities, $5 billion for preferred shares and warrants in Bank of America Corp. and the acquisition of Lubrizol Corp. for about $9 billion,” the report said.

Why was Warren Buffett’s Berkshire Hathaway investing at a time when market sentiment had been hit by eurozone crisis and US economic woes?

Mr Buffett’s letter to Berkshire Hathaway shareholders (March 7, 1995) for Year 1994 gave an insight into his investment approach.

“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of
the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%,” the Year 1994 letter said.

Mr Buffett went on to say in the letter: “But, surprise – none of these blockbuster events made the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.”

To underscore this point, Mr Buffett also said in the Year 1994 letter: “A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results.”

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013