Warren Buffett speaks

Manage
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Here are some snippets particularly apropos to P123 from a 1999 interview in Business Week .

On the size of his stock portfolio:
“If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. [color=red]It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that. The universe I can’t play in [i.e., small companies] has become more attractive than the universe I can play in [that of large companies]. I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in.”[/color]

On holding cash:
"Today we have $15 billion in cash. Do I like getting 5% on it? No. But I like the $15 billion, and I don’t want to put it in something that’s not going to give it back and then some. The nature of markets is that at times they offer extraordinary values and at other times you have to have the discipline to wait.

“If you think about it [i.e., the markets], you get these huge swings in valuations. It’s the ideal business arrangement, as long as you don’t go crazy. The 1970s were unbelievable. The world wasn’t going to end, but businesses were being given away. Human nature has not changed. People will always behave in a manic-depressive way over time. They will offer great values to you.”

On technology stocks:
“How do you beat Bobby Fischer? You play him at any game but chess. I try to stay in games where I have an edge, and I never will in technology investing.”

On economics:
“I am not a macro guy. I don’t think about it. If Alan Greenspan is whispering in one ear and Bob Rubin in the other, I don’t care at all. I’m watching the businesses.” “I don’t read economic forecasts. I don’t read the funny papers.”

On past mistakes:
“… The biggest cause of that kind of mistake [here, failing to buy more Citicorp in 1991], is that I stop buying when the stock starts moving up. I get so enamored of how cheap it was when I started buying that I stop. I have too often folded my tent. I believe in loading up on these things. There wasn’t anyone who thought Citibank was going to disappear. And there wasn’t anyone who thought it wasn’t cheap at $9 a share. We’ve lost very little on errors of commission. The errors of omission are the big ones.”

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As usual, every word that comes out of the man’s mouth is fascinating.

But what I find most interesting is that his approach to investing is really the opposite of the typical active stock market player. Because when you are playing the market on a daily or weekly basis, it is difficult to really take the long view, the value view. We become sensitive to the “robustness” of our portfolio, and make changes that will improve the yield in the near term. We focus on APR, and don’t like to see it dropping for more than a brief period.

If there were more value players in the market, it would be booming right now, because there is so much value out there after the 20+% rollbacks on the prices of so many quality stocks.

When you listen to Buffet, it is such a simple game, i.e., buy low, sell high. The prices are low now, but because so many people are afraid they might go lower, the bears have controlled the market for the last 5 months. Most people are afraid to buy low, and keen to buy high, because that is when everyone seems to be making money, and they want to jump aboard the gravy train.

The ports here make the big returns in a rising market, and it doesn’t seem possible to have a positive return in a down market. Even though Port123 is based on ranking stocks by their value, the big-yielding ports seem to incorporate enough momentum into the mix, that there is a frequent turnover, which goes against the long term value philosophy of Buffet. So, even the members who have the balls to ride out the kind of storm, and consequent big drawdowns, in a down market like we have experienced since November, are still doing a lot of trading, rather than buying value without regard to price movement. I mean, how many of us are using ports that rebalance annually or even semi-annually?

So, as much as most of us admire Buffet and his value philosophy, why do we then ignore it? I guesss it’s like he said, it’s human nature. Personally, I have not got the patience or confidence of a Warren Buffet. What about you?

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Jaybee,

thanks for your post.
Yes, I think “Human nature” is the key to this effect. The ports here largely ignore the findings of Buffet because our thinking is too short term.

of course it is true that there are ports here (many) which are very successful and which beat the markets and a “value strategy” handsomely over the years. The price we have to pay for this are some hefty drawdowns and big swings in the equity curve. If one has the stamina to withstand these swings (which is easier said than done) then all is fine.

The catch is: we can never be sure that a “great sim” will perform equally well going forward in time. It has been demonstrated (I think it was Olikea) that some excellent ratios (for example “Price to Sales” simply stopped working) so the ports based on this ratio did poorly in the recent past. So there is a “ratio shift” which is unpredictable. Unfortunately this can happen to any ratio or any factor we choose.

After all there is no such thing as free lunch. We have to pay a price for the higher returns we are all seeking.

Wern

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Jerry highlighted in red what I think is the most important part of Buffett’s statement. [color=red]“It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that……”[/color]

This is the arena that most of us are playing in now: Less than $1 million invested in equities and trying to get 50%+ APR. Buffett guarantees it. P123 enables us to find methodologies that have a high probability of achieving it! However, since the market high in October it seems hard to achieve. Maybe the next 6 months will prove Buffett right.

Denny :sunglasses:

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Let’s hope so! [:-B]

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Jerry and Denny:

Like the two of you, I found Buffet’s words very encouraging about the advantage of having a “small” account.

Our advantage is we can get in and out of stocks very very quickly compared to bigger players, especially so for smaller caps stocks. We can buy 100 to 1,000 shares of smaller cap stocks without moving the markets, but the bigger players need to take days or weeks to get in to buy their 100,000 or 1,000,000 shares. Thus, even if a bigger player has the same stock selection system as we do, the smaller investor benefits most. We get all our money in at the signal and then over the following days and weeks the bigger players drive the price up and up as they accumulate their large positions. The small player has a similar advantage on exits.

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The “problem” with Warren Buffett, is that like all people who are truely excellent at what they do, he makes it look so easy.

So many times I have seen him say “buy companies that are undervalued”, “you don’t need a 160 IQ to succeed” etc. etc. I mean, he makes it out to be so simple! Yet it really isn’t.

A lot of investments he made are easy to understand in the benefit of hindsight. His investment in coke in the 1980s seems like such a no brainer, it was in a distressed state, and “obviously” a brand name like coke is no about to dissapear. He made over 10+ return on investment over the years.

However, at the time, that was far from obvious. Coke had been steadily losing market share to Pepsi, which caused them to try and “change the formula”, New Coke, which, well, I think most of us know the story. Switching back and forth caused large expenses. There were problems at Coke, but Buffett saw through them. I am not sure I would have.

He obviously has multi-skills. He is obviously extremely disciplined about investing, almost psuedo-mechanical. He obviously pays attention to the quantitative factors, such as valuation. But he can also evaluate more qualitative factors such as competative edge, and qualtiy of management. Don’t underestimate him, he is very smart. Therefore when he says “i can make 50% per annum on a small portfolio”, I am sure he can, but I don’t think I can therefore extrapolate that to myself.

He obviously does a lot of reading, almost to an excessive level. Apparently he read every page in the valueline investment survey:- every single company. Also reads (probably) all annual reports, and may spend years studying and monitoring a companies’ performance before investing. Make no mistake: he works very hard, and I am not sure most of us have the inclination to do the same!

Finally, I can recommend a most excellent video of him addressing an MBA class. Its quite long, (a little old now), but thoroughly worth watching:

http://video.google.co.uk/videoplay?docid=-6231308980849895261&q=warren+buffett+mba&total=32&start=0&num=10&so=0&type=search&plindex=0&hl=en-GB

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I get the feeling Warren Buffett is often misinterpreted or simplified and misapplied to a degree that renders his advice as dangerous if taken without understanding. I guess the most obvious case of this was during the go go 90s where it was trumpeted around that the best stock was the one you never sold. This at a time tech growth stocks were all the rage. Another was hearing of tech stocks with a built in moat.

His way of investing is an integrated whole. It’s not a bunch of guidelines to mix and match as one pleases. The perception I have is that a casual familiarity with many of his ideas may lead one to not realize how strict he is. He is very strict.