Forum Archive Index - February 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Bill,
 

> 
>Snoopy wrote: 
>
>>If Warren sees a stock that will yield him this amount
>>and it is in a downtrend 
> 
>>he will buy it.
>  
>>Or if the stock price goes too far above fair value then 
>>Warren will sell
> 
>  
>Now that is interesting, in that it suggests that Warren 
>is not a "buy and hold", person. 
>
>

Yes, actually it is a bit of a myth that Warren is strictly 'buy and 
hold'.   Warren does sell if a business he is invested in becomes too 
highly valued (the reverse effect of when it became undervalued and 
he bought in).  For example, if his stock calculation shows a 
projected internal rate of return of only around 5% he might consider 
that too small a potential return to offset the risk  of continuing 
to hold the stock.

I think the myth that Warren is a buy and holder arose because when 
Warren looks for companies he looks for things that will be around 
for at least twenty years.  This doesn't mean that Warren will 
definitely hold that share for twenty years.  It means that if the 
valuation remains compelling with respect to the market price he will 
be happy to hold it for twenty years.  But if 'Mr Market' does decide 
to get irrationally exhuberant over the stock then he will sell it.



>
>
>Perhaps it should be borne in mind that Warren buys a 
>significant stake in a company which gives him a
>advantage over the small investor.
> 
>


I used to think this myself.  There certainly are advantages to 
being big.  You can walk into the door of a fund manager and offer to 
buy a big block of shares, say 5% of a company, in one hit and 
probably negotiate a discount while doing it.  

But there are disadvantages in being big too.   For example, buying 
into some of the second line shares that I am invested in, like LPC 
and SCT, would only be a morning tea money transaction to Warren.   
Even if Warren invested in something like Telecom ,and it doubled in 
value, the total amount of Warren's gain would hardly be a blip on 
the Berkshire Hathaway balance sheet.  On the other hand, you and I, 
(starting with a much smaller asset base) could do very well out of 
investing in the New Zealand market using Warren's principles, even 
if Warren himself couldn't do the same.

> 
> 
>I wonder who would be buying when well above fair value, the
>suckers?
>  
>Could there be a way that the "sucker" could give himself some
>protection. The chart posted might do just that.
> 
> 


People do have different investment time horizons and dividend yield 
requirements.  So I think it would be unfair to brand anyone buying 
a share off Warren as being a sucker.  

However, given that a share is fundamentally overvalued and Warren 
is already out of it, perhaps charts can help you here.  Buying a 
share that is fundamentally overvalued probably means that the price 
is driven by emotion.  A chart will provide a measure of this.   The 
problem with this kind of approach is that every chartist thinks they 
will be disciplined enough to get out before the big dip.  History 
shows that when a high price share falls it can fall heavily and 
suddenly.   Even if you can devise a trading system that gets you out 
ahead of the crowd nine times out of ten, that tenth time can kill 
you.   So I put it to you, why risk buying the expensive shares when 
there is far less risk of ruin in buying the cheap ones?

SNOOPY

PS I enjoyed that link to the radio interview of Mary Buffett.  I 
listened to it a couple of times to let it sink in!   The most 
startling point I got out of it was that Warren considered that if a 
small investor was making more than two investments per year he was 
probably making too many.  Food for thought!


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