Warren Buffett’s Metric Says BUY!

February 4th, 2009  |  Published in Investing  |  1 Comment

warren-buffett-metric-chart

Famed investor Warren Buffett has a metric that says the best time to buy stocks is when the total market value of U.S. stocks is 70-80% of the output of the U.S. economy, the gross national product. Stock quotes are the source of this information.

Well, that’s where stocks were in late January, when the ratio was 75%. Nothing about that reversion to sanity surprises Buffett, who told Fortune that the shift in the ratio reminds him of investor Ben Graham’s statement about the stock market: “In the short run it’s a voting machine, but in the long run it’s a weighing machine.”

Buffett’s metric says it’s time to buy [Yahoo Finance]

Copycat Portfolios Are Dangerous

September 24th, 2008  |  Published in Investing  |  4 Comments

A recent Yahoo Finance article about copycat investing discusses the dangers of copycat investing, that is, copying the investment portfolios of some successful investors like Warren Buffett. It lists asset diversity, investment horizons, institutional knowledge/research, and cost as the main reasons why copy someone else may be a bad idea.

I personally think that asset diversity and investment horizons, the first two dangers they list, are the most important reasons why you shouldn’t simply copy someone else’s, especially someone as big of an institution as Berkshire Hathaway. Since you probably won’t have Buffett’s deep pockets, you won’t be able to buy enough of each of his assets to overcome the transaction costs. If you can’t buy the whole portfolio, you’re really just gambling with a little added information because Buffett is counting on the entire portfolio increasing, not each and every individual investment.

Secondly, investment horizons for a large firm like Berkshire is different than your horizon. It’s funny, despite what people say, most want to see a stock appreciate within the first 12-24 months. This is backed by a 2001 study: “In fact, according to an often-cited November 2001 study by Gavin Quill (a senior vice president and director of research studies at Financial Research Corporation, a financial services research and consulting firm), mutual fund holding periods in 2000 were only about three years! That is well shy of the more than 30 years that Berkshire Hathaway has owned shares of Washington Post Company. In other words, on average, institutions seem to have much more patience than their individual-investor counterparts do.”

So, read his books and learn how he picks his choices, but don’t try to copy each and every one.

Four Investment Tips from Tom Gayner

August 20th, 2008  |  Published in Investing  |  1 Comment

Tom Gayner is the Chief Investment Officer of Markel and one of the premier investors in the world. He’s so good that Legg Mason’s Bill Miller, a phenom in his own right, said that Gayner would make the perfect CIO at Berkshire Hathaway. Gayner has four investment tips gleaned from his comments by the Motley Fool:

  • Invest in profitable businesses with good returns on capital.
  • Find honest and talented management with capital discipline.
  • Seek out companies with attractive opportunities to reinvest their capital.
  • Buy at a fair price.

It sounds like simple advice but the bottom line is that many people ignore it because they want to hit home runs, rather than doing something more repeatable (and reliable). Those four ideas also happen to coincide very closely with the ideas Berkshire Hathaway’s Warren Buffett has been saying for years. When Buffett was chastised for missing the whole tech boom, he commented that he couldn’t understand the insane valuations and so he bought what he understood. I don’t remember many people mentioning that he missed the bust too.

As for Gayner and Markel:

Through 2007, Markel’s equity portfolio returned 10.7% annually over the previous 10 years, a track record far outpacing the performance of the S&P 500. Though Markel’s equity portfolio has fallen by nearly 15% through the first half of 2008, the kind of market environment we’ve been in provides fertile ground for snatching shares of high-quality companies. In Markel’s last conference call, Gayner remarked, “I’ve never experienced this high-quality approach as out of favor as it is right now, especially since valuations were historically reasonable for these firms as we entered the year.”

Simple Lessons From an Investing Genius [Fool.com]