Debunk the Myths of Buffett

Buffett Mania

Traditionally, growth stocks have higher P/Es than value stocks, but the reverse is true today. As of 11/25/13, the expected P/Es (from finviz.com) of some randomly-picked stocks are:

Growth Stocks	Expected P/E	Value Stocks	Expected P/E
Cisco	10	Coca-Cola (KO)	18
Apple	11	Colgate-Palmolive (CL)	21
San Disk	12	Verizon (VZ)	14
Average	11		18

I suspect it is caused by Buffett and his followers coupled with low interest rates from bonds and CDs. KO, CL, VZ and many others belong to the stocks that Buffett would own. They all give dividends and have an edge such as brand name and monopoly. The above are only small samples of these stocks in the respective category. To me, it is a mild bubble and I name it Buffett Mania.

This mania will not continue as we’re running out of these stocks to buy. I do not believe there will be opportunity to buy them at 50% discount (as Buffett preaches) unless we’ve a market crash. When a strategy is over-used, they will not be effective. No exception.

The Reality

Warren Buffett is one of the premier investors in our generation. However, some of his practices are not applicable to today's market and/or to us, the retail investors.

Most of the money earned was for himself and not for the stock holders of Berkshire in the last three years. SPY, an ETF simulating S&P 500 index, offers greater diversity and has seen less volatility. If Buffett is such a hero in picking stocks, then those who constantly beat the S&P 500 Index by a sizable margin are better investor heroes, and there are many. We need to constantly scrutinize whom we listen to.

Performance Comparison

 As of 11/1/2013, the annualized return for the last 3-year:

BRKA	SPY
10%	11%

SPY gives an annual dividend of about 1.5% (about 1.9% this year) and BRKA does not. Not even beating SPY as a primer investor is just mediocre.

Why Buffett’s current mediocre performance is important

I do not care how much money he made 10 years ago but what I will make in the next 10 years. Many have been utterly convinced by the many books written on his achievements many years ago. Are his strategies still relevant to us?

When Peter Lynch (managing the Magellan Fund, 5/1977 to 5/1990) lost his golden touch and he quit the job, I got my money out! Most investors did not even after experiencing several years of poor returns (compared to his previous incredible performance). The result was many years of mediocre return for the fund. Hence, Buffett’s mediocre performance in the last three years matters and it could be the canary to his future performance.

Many of his teachings are still relevant and they are described in the next chapter. The following practices are to be debunked. I just want to seek the truth. Am I dumb on my part to argue with his success? Read the following with an open mind and decide it yourself.

Debunk the Myths

·        'Never sell.'

The “Buy and Hold” strategy has been dead since 2000 for most. It is not a good strategy for experienced investors as the fundamentals of most companies change after several years and market timers can detect market crashes using market timing. Most books and comments that praise this strategy are based on data from before 2000. It may come back in the future such as a secular bull market that I predict in 2018.

Buffett made big money in KO for the first 10 years of his ownership, but not a lot 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 the companies' fundamentals that could have changed since the last time I reviewed them. Buffett’s ownership in The Washington Post [Update: it was sold recently; he must have read this book J] was amazing then, but it could be too risky now if their paper does not take measures to stop the losing battle of paper publishing.

Market fundamentals perpetually change! To illustrate, there were ten well-known department stores ten years ago mentioned on a TV show, and only Macy’s survives; most others were acquired or bankrupted. The acquired may fare better. However, you need to analyze them again whether the combined company still fits your requirements and objectives. 

There are so many examples to debunk the evergreen concept such as AIG, BlockBuster, HPQ and GE. The market is changing with new technology and competition. We cannot buy and sit back enjoying the appreciation and dividends.

·        '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. It is similar to buying Treasury Bills that have no loss in theory. However, holding Treasury Bills until maturity loses buying power due to inflation. Nothing risked means nothing gained. Our capitalist system punishes us for not taking risk, so is trading stocks.

Evaluate the ratio of “return / risk” to see whether the expected return is justified for the risk. If there are equal chance to lose 50% and gain more than 100%, then the risk is justified. 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 his/her investment methods.

·         'Margin of safety'.

There will be too few stocks to buy if everyone treats margin of safety as the first priority. It worked for Buffett before as few followed his ‘margin of safety’ practice. This is the herd mentality. However, it should work again if fewer folks are truly concerned about the margin of safety. However, most institution investors follow Buffett’s preaching and they drive the market.

Most fund managers and analysts learn margin of safety in colleges. I do not expect we will have less folks following the theory on margin of safety. When you follow the herd, you will not beat the market. The margin of safety is equal to the difference between the stock price and the intrinsic value, which is quite easy to obtain from many web sites.

Let me illustrate an example of my applying the right strategy to current market conditions. During a secular bull market (2018 according to my prediction), the market would favor momentum and growth over value and hence ‘margin of safety’ will not be appropriate.

·        '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 emotions and no legal liabilities attached. Do you really think your ideas on how to run the company will influence the management’s decisions via your votes?

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This is one chapter of my book "Complete the Art of Investing". If it helps you, envision how 870 pages will help you.

For more of my reasoning, check out the book described next. It has 870 pages (6*9) for $9.99. It could be the best $10 you ever spend.

The above is an abstract from my book "Complete the Art of Investing" which is available from Amazon.


I challenged to have the best-performed article in Seeking Alpha history, an investing site, for recommending 5 or more stocks in one year after the publish date. The concepts for that article are discussed in this book.

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Joke on Buffett: click here or type the following.
http://tonyp4idea.blogspot.com/2016/04/some-one-asked-me-to-comment-on-buffett.html