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.