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Benefits and Pensions MonitorBe Like Buffett
Now that summer is mostly over, its time to put away the best sellers from Rowling and Grisham and look at some finance and investing books. Of course, the best-selling books on this side of the aisle tend to have the name ‘Warren Buffett’ someplace in the title. This list of Buffett-related books is growing all the time, including a book (and a workbook) by his ex-daughter in law, who kept the famous name even though she divorced Buffett’s son a dozen years ago. I’ll pass on that one, but I did look at another book titled Trade Like Warren Buffett by James Altucher. The title points to an interesting dimension behind the down home sage from Omaha, which is that there has been more to Berkshire Hathaway’s success than loading up on companies like Coca-Cola, Dairy Queen, and Gillette, and holding them forever. These companies have formed the core holdings, to which Buffet has added, and sold other stocks over time. Even recently, such holdings as Automatic Data Processing, Dover Corporation, and the Gap were accumulated and sold over a period of under three years. This may not qualify as ‘trading the market,’ but, on the other hand, it isn’t quite buyand- hold either. More broadly though, Buffett has made a significant amount of money (though nobody quite knows how much) in more complex strategies. This includes work-outs and merger arbitrage, commodities, fixed income arbitrage, and private investments in otherwise public equities (the most well-known of which was the purchase of $700 million of convertible preferred stock of Salomon Brothers). Nothing wrong with exploiting market inefficiencies wherever you find them. However, the problem is similar to that found with other funds that use these strategies today: nobody is really anxious to explain how they go about making money. Buffett sure doesn’t detail his approach with these strategies, so Altucher is reduced to interviewing a range of other traders, arbitragers, and fund managers, who run funds that use these strategies. All in all, not very enlightening. Any reader would be much better served by turning to another facet to Buffett, again which is glossed over in the coverage of the value investing style, which is the search for growth stocks. This approach is best found in Philip Fischer’s 1958 book Common Stocks and Uncommon Profits (updated in 1975 and re-released last year). Buffett acknowledged the debt he owed this work when he said that his investment style is “85 per cent Ben Graham, and 15 per cent Philip Fisher”.
Even if the company returns to ‘fair’ value, that movement effectively ends the potential profit from investing in such a business. Holding an average company, because it was once undervalued, but is no more, makes little sense. Instead, you should look to good companies that can grow their sales and earning year after year. Along this common sense path to investing is Poor Charlie’s Almanack, subtitled: the wit and wisdom of (Buffett sidekick) Charlie Munger. If you can get a copy (look at www.poorcharliesalmanack .com, and note that all proceeds go to the Munger Research Centre at the Huntington Library), it is worth several flips through the 480 well-illustrated pages. Written in the style of Ben Franklin’s Poor Richard’s Almanack, it too extols the virtues of simplicity, virtue, and thrift, except with a focus on business and investing. Here are only two great samples that take us leaps away from just searching for value stocks. “There are worse situations than drowning in cash and sitting, sitting, sitting. I remember when I wasn’t awash in cash – and I don’t want to go back.” Or “ I think indexing is a wiser choice for the average foundation than what it is now doing in unleveraged equity investment – and particularly so as its present total croupier costs exceed one per cent of principal per annum. Indexing can’t work well forever if almost everybody turns to it. But it will work all right for a long time.” What is the take-away from this review? When you want real wisdom, go back to your primary sources: Buffett and Munger, Fisher, and maybe even old Ben Graham himself. Jim Helik is co-author of ‘Energy Markets Risk Management,’a textbook published by the Canadian Securities Institute. He also teaches at the School of Business, Ryerson University in Toronto. |
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While placing great emphasis on stock fundamentals, Fisher realized that even a greatly ‘undervalued’ company could prove to be a horrible investment. Sure, you might occasionally buy a stock because it is cheap, but what if the business is horribly run? 