Thursday, September 15, 2016

Buffett’s best insights

Warren Buffet has had some amazingly simple yet amazingly insightful investing anecdotes to share over the years. I thought I would share some of my favorites. 
Warren Buffett has been a source of great investment advice over the years one of the most interesting things about this advice is that it’s typically delivered in a fairly easy to comprehend way that the average investor can relate to. I was just reflecting the other day on how some of the buffets own pearls of wisdom could’ve helped make me a better investor and could more optimally shaped my investment decisions at various points in time.

In the short term the market is a popularity contest in the long term it’s a weighing machine

I really love this bit of advice. It suggests that an investor should completely ignore short-term market movements and not bother checking into their trading accounts on a daily, weekly or even monthly basis. Far too many times, investment decisions tend to get made spontaneously. If you see the share price of a stock has been consistently moving up, three or four days in a row, that often leads to a gut instinct to go out and chase the stock and buy it before it continues to go higher.
Conversely buying a stock which has a declining share price over a short period of time sets in train a world of negative emotions that can result in unproductive decisions such is selling that same stock on the basis of random market movements.
Over the long-term though it’s really the weight of earnings that determines the businesses success. This is an important factor in determining whether to continue a long-term partnership with the business. To the extent that earnings rise and continue to rise investors should be predisposed to continue to retain an interest in that business. Too often we think that just because the stock has gone up 100% there’s no reason that it will continue to go up another hundred percent more.
In fact nothing could be further from the truth. I prematurely sold a solid position in MasterCard in 2008 with no real appreciation for what the business could become even though it was still demonstrating a very solid track record of good earnings growth.
I look at Celgene as one of my current holdings which hasn’t moved much over the last 12 to 18 months as far as stock price appreciation, however the revenue and earnings of the business continue to increase at a steady clip. I like that weighing machine analogy that Buffet espoused as far as helping me think through where this business should be if it continues to deliver strong earnings.

Opportunities coming infrequently, when it rains gold put out the bucket not the thimble.

I really like this quote because it suggests that when you see good value, ensure that you double down to take maximum advantage. This is something that I believe I should’ve done more of in 2009. Unfortunately market declines were so severe and scary that it was often hard to summon the courage to buy more then small amounts at a time.
I had a bit more luck applying this into 2011 when I picked up shares of Cochlear when they were trading significantly down after a product recall decimated the share price. I knew the company was a quality holding which would eventually bounce back long term ones short-term operational issues surrounding the product recall had been fixed. I didn’t hold back and made the business my largest position. It since appreciated almost 2 1/2 X above my initial entry price.

Diversification is a protection against ignorance. Those that know what they’re doing don’t need it.

This is an interesting statement which seems to fly in the face of conventional wisdom. Buffet argues that those who know what they’re doing typically place no value on diversification. I think one has to take this statement with different levels of conviction based on how confident you are in your judgment. To many people, diversification certainly holds a important place in an investment portfolio to ensure that your bets aren’t too concentrated in too few ideas in a limited number of sectors.
However what all investors can take from this statement is the importance of having conviction and doubling down in your best ideas which represent the best value. There’s no point in investing in hundreds of stocks because you may as well just have an index fund to do that for you.  Buffet’s suggestion on this point is coming from the perspective of a concentrated investor who has a track record of successfully putting a majority of his capital into as few as five or six positions.
From my own personal experience I found that having too heavily concentrated a portfolio is an approach that doesn’t necessarily work well for me. However I do see the practical sense in varying the amounts that you invest based on what your best ideas are and what positions have the greatest prospects for long-term return.

Don’t be in a hurry to swing, wait for a fat pitch

It’s sometimes hard to have the patience for a stock that you like to fall to a price that’s attractive. There’s too much of a tendency to want to buy immediately for fear of missing out. However the reality of markets and the reality of investor expectations is that over a long period of time stocks will always fall into a price that is within one’s strike zone.
Whether it’s macro concerns or mixed earnings, I’m yet to see an example of a stock that hasn’t fallen into my strike price at one time or another however I typically don’t have the patience, nor the capitals saved up to wait for these times. Buffets advice here is a good reminder to not be in too much of a hurry to charge. It also illustrates the value in having capital saved up to take advantage of rainy days.

This article was written by Financially Integrated. If you enjoyed this article, please consider subscribing to my feed.


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