Debunk the myths of Buffett

1             Debunk the myths

Buffett is one of the premier investors in our generation. Some of his practices are not applicable for today's market.

Most of the money earned was for himself and not for the stock holders of Berkshire in the last three years. SPY offers greater diversity and less volatility for the last three years. If Buffett is such a hero in picking stocks, then those who beats S&P is a better investor hero. There are many investors who beat S&P 500 by a wider margin. We need to constantly scrutinize who we listen to.

Performance Comparison

 As of 1/15/2013, trailing 3-Year Return.

BRKA	S&P 500
12%	11%

Beating the S&P 500 by a small percent as a primer investor is just mediocre.

Actually BRKA have lagged the S&P 500 a few years ago, it has recently been improving.

Why Buffett’s current mediocre performance is important.

Many have been utterly convinced by the many books written on his achievements. Are his strategies still relevant?
When Peter Lynch (managing the Magellan Fund, 5/1977 to 5/1990) lost his golden touch and he quitted the job, I got my money out! Most investors did not even experiencing several years of poor returns. The result is many years of mediocre return. Hence, his mediocre performance in last three years matters and it could be the canary to future performance.

Many of his teachings are still relevant and they are described in many books. The following practices are to be debunked. I just want to seek the truth. It appears dumb on my part to argue with success but read this with an open mind.

Debunk the Myths

·        'Never sell.'
The “Buy and Hold” strategy has been dead since 2000. Most books and comments that praise this strategy are based on data from before 2000. It may come back in the future like a secular bull market that I predict in 2017 (Chapter 36).

Buffett made big money in KO for the first 10 years of his ownership, but not much in the next 10 years. If he cashed in after 10 years of ownership and then bought another stock with similar performance, he would have made far, far more.

I prefer to turn my portfolio to reflect the current market conditions and companies' fundamentals that could have changed since the last time I reviewed them. Buffett’s ownership in Washington Post was good then, but it could be too risky now if their paper does not take measures in stopping the losing battle of paper publishing.

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Market fundamentals perpetually change! There were ten well-known department stores ten years ago mentioned on a TV show, and only Macy’s survived - most others were acquired or bankrupted. I read an outdated book by a very famous author. A very good portion of his recommended stocks have not survived. However, most made great profits in the year after his recommendation.

·        'Only buy the company whose products he understands.'
He must have missed a lot of great companies like Apple as he does not use any of Apple’s products. It is better to try to understand their products and their profit potentials, and make your decisions accordingly. He should depend more on his resources and his many analysts who should have diverse disciplines.

·        'Rule #1. Do not lose money. Rule #2. Do not forget rule #1.'
If every stock bought is risk-free, the return cannot be that good like buying Treasury Bills that have no loss in theory. However, holding them until maturity loses buying power due to inflation. Nothing risked and nothing gained.

However, by comparing the ratio of return / risk, evaluate whether the risk is justified for the return. If there are equal chances to lose 50% and gain more than 100%, then it is worth it to buy the stock. It is not a science, but probability theory and common sense are decent tools. In the long term it usually works. In addition, one's personal risk tolerance determines the investment methods.

·        'Margin of safety'.
There will be not too many stocks to buy if everyone treats margin of safety as the first priority. It may work for Buffett before as few followed his ‘margin of safety’. This is the herd mentality (or Chapter 90) I wrote. However, it should work again if less folks are truly concerned about the margin of safety.

Let me illustrate an example of my applying the right strategy to appropriate market conditions. As of 1/2013, the market favors value stocks and cash waiting for opportunities to buy. Assuming that there is no W-shape recession, the next phase of the market cycle should be gaining momentum and growth with no regard for a margin of safety.

·        'Think of Stocks as a Business'

As an owner of many stocks, I do not have to run my portfolio, like a holding company. I do not fire employees, do not have legal obligations, do not make day-to-day decisions, etc. I can sell the stock with a click of the button with no emotional and no legal liabilities attached. Do you really think your ideas on how to run the company will influence the management’s decisions?

Running a business is very different from investing in a company. Do not be confused! Investors’ only objective is to make a profit with least risk.

An optimal portfolio of 30 differentiated stocks, where is the time to simultaneously run 30 companies responsibly?

·        Buffett’s portfolio is not diversified enough. However, the portfolio under the insurance company might. When he trades, he pays extra due to the huge volume. Day traders will take advantage of Uncle Warren.

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My e-book Debunk the Myths of Buffett could save you a lot of money in investing.
  http://ebtonypow.blogspot.com/2012/12/special-debunk-myths-of-buffett.html

Sample portfolio for the book.
  http://stockportfolios.blogspot.com/2013/03/welcome.html

(c) 2013 Tony Pow

Disclaimer. I'm no responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.

Laptop vs iPad

I just bought a $400 HP laptop. It costs $100 less than my iPad.

I use the laptop 8 hours a day and at least 5 days a week (yes, I'm typing this post with my laptop). I use my iPad 1 hour at most for 7 days a week.

All my important stuffs like researching stocks and reading SeekingAlpha artickes are done on my laptop. I play one favorite game and watch movies/Youtube for better quality on the iPad.

I used to look at Facebook and mail using my iPad after working hours due to taking too long to boot my laptop. With the new Windows, it has been cut substantially that I do not use iPad for these tasks.

My grandchildren picked up how to have fun with the iPad in no time. It has to be helpful for early development, but playing games all day long for older children may not be good.

All my investing software are run on my laptop but can't on iPad. It is a case that the most beautiful woman will do you no good if she cannot satisfy your needs.

I rest my case.

Avoid debating with biased folks

When we talk about the OS in enterprise, we're talking about PC, laptops, servers, and NOT phones. My last post on this thread. When we debate with biased folks, it would make us biased too. 


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UNIX will take over Window. I heard it many times ten years ago. It does not materialize. The corporate managers cannot get away from Window - most managers will not want to risk their jobs to take risk of using a proven system even a buggy system.

UNIX takes over servers as Windows are not designed for these tasks.

The phone market will be determined by the enhancements of Intel processors and Windows 8. So far promising, but not making a dent. 

Upgrading software

The world is changing but many do not keep up with the changes. No managers in the right mind would change those old COBOL programs as used flawlessly in many banks, utilities... as they have been working fine and a bad code (even the best coder like me would make a mistake after one or two drinks during lunch) would cause the career of a manager.

They are reasons to upgrade:
1. Obsolete machines. You may not be able to find maintenance for DEC equipment (so are Wang, DG...), or software tool like PowerBuilder.

2. New applications or big changes. We have rewritten some applications due to large changes in a more-up-to-dated platform.

3. 1999 is the year we rewrote a lot of applications to kill two birds in one stone. That year we had programmers 120% employed.

4. New choices like cost reduction in outsourcing coding to India.

5. Better saving. We can save a lot by using web applications in maintenance. It is a time-consuming job to upgrade applications in 100 or so PCs.

6. Some new applications like Netflix cannot be written in traditional way that requires you to load it from a disk drive to your local PC.

Expected P/E is better indicator than past P/E

From AAII screens.


Accumulative return from 1998 to 2009.

Screen of Value on the move -PEG with Est. Growth = 710.
Screen of Value on the move - PEG with Hist Growth = 328.

So, the Est beats the History by 100% if you assume PEG and P/E are corresponding in this comparison.

The market from Feb. on

I believe it does not have too much room to run (I'm against most analysts). January has too good a run. I predict a 10-12% gain for the entire year of 2013. Newton's Theory of Gravity never fails.

My 2012 prediction of 10% is quite accurate and beat most experts.

I expect the market to be volatile every time we have the huddle in the debt problem.

Small Chinese companies

Do not buy the small companies unless you REALLY understand the company. There are too many frauds. Even CAT was fooled by a small Chinese company and had to write off that company it acquired.

They do not have an organization like SEC here. It is a wild, wild west. I have been burned more than one time, so shame on me. I routinely skip the companies with Chinese address and Chinese names for their executives as I do not trust their financial data. I hope the Chinese government will set up their own SEC soon to lure foreign investors.

However, a lot of folks made money on small Chinese companies and the two richest folks I know (one is friend's friend and another one is my high school classmate) got very, very rich by participating the IPOs of some Chinese companies (well-known now). Also, I believe the best but risky investment would be in China for the next 10 years.

Get rid of bonds

Bond prices are on its way down for real this time. The interest rate is too low and it has no way to go but up (bond prices move in opposite direction). In any case, get rid of bonds as the reward/risk is low. 

The government cannot help this time as it is running out of tools to fix these problems. 

When the economy returns, the interest rate has to rise. The reward/risk is not there. 

More on CISCO

Cisco is one of my top stocks I own. It has been doing good due to the right timing to buy it. Here are my two cents.

* Cisco accuses China with no valid arguments on the security of data passing Chinese routers (about 20% already). As a result, Chinese government limits its expansion in China. It is a case of the US sales force does not care about their own sales force in China.

* They do not have the state-of-the-art products such as G4 for LTE by the top 3 companies. However, they had a good opportunity to buy ALU when ALU was at $1 with a lot of cash they are holding. They did not and missed the opportunity. I also own ALU, but the ratio is about 5 to 1 (weighing high with Cisco).

They accused Huawei for stealing their products and now some Huawei's products are more advanced than Cisco. The stealer is better than the stealee. If the company welcomes others to steal their secrets with open arms, its management cannot be that good.

Windows 8

I like the new Windows esp. in the reduced time to bring up the system. 

However, there are bugs/problems that should be fixed.

1. Force you to upgrade. What happens they force me to upgrade in the middle of a presentation to the world leaders? Same as the previous version.

2. The network connection is not automatic and the previous version does. Recently, it seems it does.

3. When I move an object on screen, a lot of times the object becomes full size and that's not my intention.

4. Metro UI is not for me. Windows should have two versions, one for tablet and one for laptop.

5. I prefer my old game than the fancy ones. Microsoft needs focus group, Alpha testers, Beta testers..
.

6. I do not know how to close my PDF reader besides bringing up the Task Manager or calling Bill at 1-800-bad-software.

However, Windows is heading to a new world and I believe it will be successful or most of us have no better choice. My HP 17" laptop is only $400 after all the rebate and discount.

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So far it has not crashed

A tale of two colleges in Amherst

The physical distance between Amherst College and U. Mass., Amherst is a few miles. The difference in tuition costs is astronomical (so are the professors but at less degree of discrepancy). However, your primary aim to go to Amherst is not to learn a professional skill or meet girls unless you're homo (a boys' college), but to meet the students with the same high social status and a stepping stone to Harvard.

Education and investment visas

* On education.
We encourage folks to make easy money for being popular singers, athletes, managers (at least once)... Most folks in high tech fields want to be managers and Asians do the real jobs. Check the Asian population in Google, Apple, Microsoft...

* On investment visas.
Most richer Chinese want to come to USA for many reasons. Some are corrupt officials, so immigration would save them from being prosecuted. Most want to come to a land with controlled pollution in air, water and reliable food. Going to colleges is easier and better here. We all vote with our feet.

My experience in owning gold coin

When I had a one-man company, I tried every way to save taxes (not a good move). I invested in annuity that is > four times better (the compounded rate of return may not be that great) for 20 or so years.

I invested in gold coins at about $400. After 15 or so years, it did not appreciate. A few years ago, suddenly it shot up to 800, I sold some and then some at 1000.

The lesson of the story: The human nature or investment timing does not allow us to keep the investment to the max. value which is about 1800.

Most gold coin shops charge a lot of commission esp. for small qty. When you sell a larger qty (I forgot the # now), the gold coin shop would report it to IRS. There are tax invasion tricks like treating them as antique or sth like that. I paid full taxes. Call me stupid but honest.

Obama and his legacy

Our voting system has its faults using Obama (nothing against him) as an example.

Every president cares about his re-election in the first 4 years, and then (if elected) about his legacy which helps him to write books and secure a place in history. Now he has less than two years to build his legacy. Obama is no exception. He has to agree with his own party and fight against the opposite party that controls the Congress. 


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I do not blame Obama totally. He inherited the problems 4 years or so ago.

It is our political system. His aim was getting re-elected. We have to blame ourselves as we voted for him. He bought votes by giving money to everyone. Here are some of my objections.

* Raise min. salary. It is good when the economy is doing good, not now.

* Buying Hispanic votes by promising the residency for illegal aliens. Which country welcomes illegal aliens?

* Does not know where the money comes back when he spends recklessly.

* Both parties do not treat gun control as an issue in the election after we had so many incidents.

* Reposition US 'influence' to Asia that may have stirred up islet disputes in that region. Can we afford another war?


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If the economy recovers, there is no credit to go to our leaders. It is a gift from God to give us shale energy and time which would cure most if not all wounds.


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This post and the last two have too many whipping on the government. Sorry for speaking my mind as I'm no politician.

USPS

USPS is supported by junk mails, which are migrating to the internet. Junk mails have the advantage of being glossy and good looking and making you feel guilty (for the environment) when you dump them to the waste basket where they belong.

Digital junk mails are good. They do not jam my mail box, spend less time to delete them and most importantly 100% recycled by a click of a button

Long, long time ago, they should follow UPS's model. They missed the opportunity that leads them to distinction soon.

The functions of sending bills, statements and many other functions can be done on-line today.

Agree with Sam that there should be a tax on junk mail for cutting trees and adding junks to our planet.

Federal Reserve Bank

Federal Reserve bank has a strange relationship with the government. Officially it is a government agency. The workers at the Federal Reserve bank do not work for the government, but they have similar salary grades.

As with most government jobs, they have good benefits and some have gyms. and even pool tables. Some full-timers I knew worked for 4 hours a day. So, by characteristics, they're pretty much government jobs.

Their main function is serving as a banker to its member banks. It prints and controls the distribution of money and hence inflation/deflation.I feel sorry for those workers who 'burn' money 8 hours a day. Why can't them keep some before they're burned? I also wonder why the bank does not give some sample at the end of the tour like the beer company or candy company do.

In any case, the government and the Federal Reserve bank sleep on the same bed.

The China Sea is gathering storm

If there were a war between China and Japan (the #2 and #3 economy), the US (#1 economy) will most likely support Japan and all the economical forecasts in this book as of 1/2013 will be off and we will be in a global recession.

There have been disputes with the islets between China, Taiwan, Japan, Korea, Philippine and Vietnam for the presumed oil or gas in the near-by ocean. The disputes have been mild for over 40 years (I remember the protest when I was a college student) and no side wants to do anything until recently. All these countries would not want to agitate China and China would not want to harm the trading relations. Now, the U.S. wants to side with countries against China. With the backing of the U.S.'s Seventh Fleet and the U.S.'s promises (hidden but quite obvious to me), all these countries suddenly cry out loudly for the last few years.

If China starts the dispute initially, China grossly miscalculates and grossly underestimates the might of the U.S. navy. If Japan resumes the dispute, they are risking losing trade (#1 export to China) and tourists from China.

It is the U.S.'s intention to remain as #1 and the most powerful as the big brother in this part of the globe. It is not a wise decision unless we still live in the past glory when you're either my puppet or my enemy. Most likely, it is decided by the politicians who want to divert our attentions as they cannot resolve our problems such as employment.

If the U.S. wants to promote selling weapons to Asian countries (the U.S. is #1 in exporting weapons), we are playing a risky game and the potential profit most likely will not justify the consequences.

China might withdraw the loans and we would be back to the worst depression in our history. It is quite dumb for China to loan us money to build the Asian missile wall against N. Korea and most probably against China too. When Japan and Korea fight against each other on the disputed islet, which position would we want to side with? If your answer is both, should we send missiles from one of our battleships to another one of our own?

We cannot afford another war. We've spent $1.365 trillion in the two current wars so far. We cannot visualize how much is one billion, not to mention one trillion. The current tallest building in the world (in Dubai) costs about $1.5 billion. We can build about nine hundred (900, not a typo) tallest buildings in the world and not even fathom of how many jobs would be created.

Not to mention the human suffering. China is not a tiger, but it is far from a paper tiger. Japan's navy is stronger than most folks in the U.S. can ever imagine. Japan has been the aggressor to China for centuries and has been war criminals against Korea and China in WW2. They have not compensated all the damages to Asian countries that they destroyed during WW2.

As usual, we always pick up the brick, aim and hit our own big toe. It was Vietnam, then the two wars in Middle East and now potentially the China Sea. We have not yet learned lessons from the French, the Brits and the Russians who had been all to Vietnam, Afghan and they all lost big.

No politicians would tell us that all our troubles are due to the high expense of the wars we participated. We have had about 20 years of secular bear market due to the Vietnam War, followed by about 20 years of secular bull market due to the lack of war, and now 12 years of bear market (as of 2012) due to the Middle East wars. At the mean time, many of us do not have jobs or at least under employed. I rest my case.

The disputes will not be good for all countries involved. The U.S. does not have sufficient resources to start another war. Hope it will not happen. Let the sleeping dogs lie and silence is the gold. The one who started to surface the dispute is grossly miscalculated.

Afterthoughts.

·         The point of my blog is not on the dispute itself: Why the dispute re-surfaces after 50 years or so? I suspect it is the U.S.'s hidden agenda. My guesses are: Help Obama reelection, the U.S. returning to S.E. Asia, selling weapons in the region (the U.S. is already #1 in weapon export), containing China... The unexpected outcome is which side the U.S. will be when there is a dispute between S. Korea and Japan. If you look at the map, I can tell one disputed islet is closer to Vietnam / Philippines and the other one is closer to Taiwan. However, it is not the point of the blog.

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My e-book Debunk the Myths of Buffett could save you a lot of money.

http://ebtonypow.blogspot.com/2012/12/special-debunk-myths-of-buffett.html

(c) 2010-13 Tony Pow

Disclaimer. I'm no responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.

A non-correlation of market cycle and business cycle

A non-correlation of market and business

The Business (same as economic) Cycle is supposed to lag the Market Cycle¹ by about 6 months as the stock market is a leading indicator of the economy. As of February of 2013, this has not occurred, therefore the US economy is in a non-correlation to its stock market.

The market has recovered most of its losses from 2007-2008.

The economy is still in a recession considering the high unemployment and under-employment and the poor GDP growth. The global economies are more inter-connected than before, and our trade partners are also not doing well. Though there have been some recent signs of recovery in the U.S. economy, the job recovery may never reach to its previous peak.

Is this non-correlation important to us, the retail investors?

For an economist, the Business Cycle is important. For an investor, the Market Cycle is important. The economists forecast business growth, GDP growth, job growth, housing start…, and plan accordingly. The investors care about the potential appreciation of their portfolios.

It could be the beginning of this non-correlation for the coming decade. There is a good chance economists can no longer depend on the previous correlation to use the market to predict the economy. As long as the market is moving up, the investors are not concerned with the non-correlation. 

However, most likely the market will correlate again in the future with the economy as there has always been a correlation as far as I can remember.


When the following reasons of this non-correlation change, then the correlation will continue and we will be back to normal.

The reasons for this non-correlation

1.       Most big companies are now global companies.

Hiring at these multinational corporations (MNCs) depends on where offer the greatest benefits, including low workforce salary, educated workers, tax credits, less tax …. A good portion of MNCs' incomes are from foreign countries. Hence the U.S. market is getting less correlated with the U.S. economy which uses local employment as a measurement.

2.       Too many government interventions.

The government bailed out too many companies that should fail. No companies are too big to fail. It has not punished the executives/bankers to get us into this recession thru their greed. The market may falsely expect that future failing companies will be bailed out.

3.       There is still much easy money.

Since the American recession, banks use government money to invest in the market instead of loaning it to small businesses and house buyers to stimulate the economy. In addition, the demands from businesses and potential house buyers have been reduced. Corporations have the highest cash reserves for a long while.

When the government borrows a lot of money (to the ceiling literally), everything including the market looks good. However, somehow and sometime the taxpayers pay for those debts to China, Japan and whatever other treasury buyers. Today the U.S. has a benefit: It will repay the debtors with depreciated dollars.

A country loses its competitive edge if a good percentage of the GDP is used for servicing those debts.  If the USA were a company that cannot service its debts, it would be bankrupt.

Most believe this is the prime reason.
 

4.       Regulations appropriate for the health of the market is typically not boasting the economy. The expected ObamaCare is discouraging small businesses from hiring.

5.      Today's market may not be a good market indicator if this were considered to be a commodity unit (a combination of natural resources including gold) or Swiss Francs instead of the USD.

6.       There are too many factors that influence both the market and the economy in separate directions. Examples include the recent shale energy discovery and never-ending wars.

What should be done

1.       The government cannot pump that much cash into the economy.

Depreciating our currency is a short-term solution at best as it would improve our trades both ways.

A depreciated currency would encourage foreigners to buy the United States’ assets that would not be good for long term. To illustrate, if the GE building were sold to a foreigner, GE would pay rents to a foreigner for years to come. It is similar to selling our know-hows to a foreign country - the seller has immediate benefit at the expense of losing its competitive edge.

2.       The United States government must address and service the debt better now! The high debt will deteriorate the United States’ competitive edge to foreign countries. A high percentage of our GDP to service the debts will not help the economy.

3.       Its citizens and the government need to bite the bullet with more taxes, more incentives to create jobs, less entitlements, less welfare… Ending the current two wars and avoiding future wars is almost mandatory to improve the economy.

4.       The economy cannot be recovered without job recovery. The money spent in creating jobs will be better spent than on welfare and unemployment benefits.

Footnote.

¹Freedy, my fellow commentator, said,

Tony, the market can only act as a leading indicator or proxy of economic activity if there is consensus on the direction. Sometimes what is coming in six months is fairly predictable but at other times when pundits are at odds the future course is fuzzy. So market indices are really tracking where consensus "thinks" GDP is going'.

To be clear a market index is a summary of where consensus believes the economy is headed and this sentiment is a proxy for forward earnings. For the playing stocks and not the index, it is their cumulative sentiment which acts a guide.

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Afterthoughts.

·         We can still use the past to data to predict the future. However, it can be getting less and less useful.

* The economy conditions changes. We did not have most today's regulations in the depression. Examples abound.

* Employment is one of the major metrics in the Business Cycle. Our economy may recover without recovering employment (unemployment ).

Why? The world is more globally connected. The corporations make more money by shifting jobs to any other country.

* QE, printing money, foreign loans (to China...), reserve currency, debt ceiling all mean the same: Live in a higher living standard that we can afford.

When Uncle Sam uses all the tools to maintain our living standard and being the world policeman (a paper one when our economy is screwed up beyond repair), he is running out of tools. Each tool is a temporary fix but a long term trap.

* The shale energy could save the entire US economy and another war could do the opposite. You cannot find this info from any economical charts and data.




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My e-book Debunk the Myths of Buffett could save you a lot of money in investing.

http://ebtonypow.blogspot.com/2012/12/special-debunk-myths-of-buffett.html

(c) 2013 Tony Pow

Disclaimer. I'm no responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.