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Investing/Trading like a Buffett

When Buffett invests, he sees a business whilst most investors see a stock price. According to Buffett, the investor and the business person should look at the company in the same way, because they both want essentially the same thing.

It’s funny, it comes back to timeframes again, and Buffett operates on the longest timescale going. His favourite holding period is “forever”, so he doesn’t need to concern himself with how the market values his shares, unless he wants to buy more. IMO a lot can be learned about future trends by watching Buffetts’ present investments. He is investing in the west and in America; and he is also investing in American oil without investing in a hole in the ground..

USA isn’t exactly powering ahead at the moment; but things are slowly changing. Have a peek at the fortunes in North Dakota due to fracking technology. This is expanding big time; and IMO is a technical revolution in the making.. Meanwhile Warren Buffett has positioned himself to take advantage of this revolution by buying up the railways; bearing in mind the massive increase in oil production and lack of pipeline to move the oil around. He certainly hasn’t forseen a sudden need to transport more teddy bears across the country:) 75% of the oil transported by rail out of North Dakota is transported by Burlington Santa Fe LLC; part of Buffetts’ empire

The Buffett mentality is an interesting one to understand, treating each investment as if buying a farm to hold for ten, fifteen, twenty years, as if there was no opportunity to sell that farm during that period. Using that analogy he compares day to day/cyclical analysis like fretting over whether it was going to rain in an hour, whether the temperature might drop by one degree the next day. An interesting way of thinking no doubt.

Warren Buffett insists that you should only own what you know. He says to be able to explain his mistakes, he says so he only does things he completely understands. Then he reveals just how easy it is to choose winning investments: ‘All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.’

In autumn 2008, as Warren Buffett justified putting his money in to stocks Buffett asserted ‘Price is what you pay, value is what you get’. He also said ‘Whether are talking socks or stocks, I like buying quality merchandise when it is marked down’. He particularly likes buying shares that are trading on low multiples of sales, or book value(BV), or mid-cycle earnings.

“I have no idea what the stock market’s going to do. I never do. Never will. It’s not something that I think about at all. When it goes down I think a bit harder about what I might buy”

“The American economy works that way. We’ve gone through… perhaps 15 recessions in this country. But the system overshoots periodically, we had a huge bubble, so a correction really should not be unexpected. But our system always comes back, it will this time, and it already is. We will come back, big time, when residential construction comes back. I think that could be reasonably soon. You will be surprised, in my view, at how quickly employment changes once we’ve sopped up the supply of housing. You hire when you have demand”

“When you look at those 15 recessions that our country has had, through most of them we didn’t really know what fiscal policy or monetary policy was. We fixed ourselves. Government can help. You’ve got low interest rates, but that can be like pushing on a string, until you decide to buy a house. When you do, it can help. But I would say by far the biggest factor in the business cycle, is the natural regenerative powers of capitalism. Capitalism works.”

During the mid-1980s major economic variables such as real GDP growth, industrial production, monthly payroll employment and the unemployment rate began to decline in volatility. Traditional business cycles have also declined in volatility in recent decades through structural changes that have occurred in the international economy, particularly increases in the economic stability of developing nations, (globalisation) diminishing the influence of macroeconomic (monetary and fiscal) policy. Buffet lived through a 50 year green candle, have you ever thought that the next 50 year candle could be a red one? I don’t want to frighten you but it’s a possibility 😉

If you are so blindly bullish why bother with stops? Just chuck it all in the market and switch off the screen for 30-40 years, it’s much less stress, and after all, it’s definitely a certainty isn’t it, cos it happened in Buffets era, so it’s bound to happen in yours…

The 100 year timeframe isn’t a holding period, it’s just to illuminate how succesful a “we’re doomed, we’re doomed” strategy has been over the years, despite centuries of wars, crises and disasters, and countless other times we’ve written ourselves off. It’s a reminder that on the longest timeframe we have, the chart starts at 25 and now rests in the tens of thousands 🙂

Of course learning to spot opportunities when they arise can be very profitable. For those investing in large FTSE 100 stocks, the time to buy is usually when the market is relatively low. Many of the constituents will have an attractive yield. Likewise, the time to sell could be when there is a profit for the investor and yields seem relatively low. A problem is mistiming the markets: sell off equities after a big market crash, then waiting for prices to start heading upwards again before re-entering the market.

That’s absolutely key to his strategy it seems, not investing with a view to say “here’s something new that is going to change the world”, but “here’s something that will weather the inevitable changes in the world, while paying for itself in dividends”. There are better articles online trying to explain why Buffett would take that view, but “a wonderful company at a fair price”, “with a strong economic moat” and “buying when it’s on the operating table” would be a fair conclusion from his previous advice.

Now there’s nothing stopping us from trying to emulate his approach in separate long term portfolios (i.e. having a Buffett portfolio, an active portfolio with risk management measures to protect month by month gains and then a day trading style spread betting account), because you can see why investors find it difficult to stick to Buffett’s timeframe.

Then there’s the small problem of having Buffett’s patience and security analysis skills, the experienced swing trader’s knack for adding to positions in growing momentum-fueled shares, and the day trader’s skills for reading a chart and making consistently profitable day trades!

But here’s where diversifying strategies work out – you have the comfort and knowledge that your long-term Buffett pension holdings will realise their value over time, maybe in time for your retirement, but how many investors get itchy feet with this method? Can you really stomach losing all that paper profit, can you last the course, when you have several years of bad performance in a row, and this is your only investment method?

In theory you’d need to be comfortable separating the three different strategies and giving them all due attention, not to mention being good at the very different disciplines of fundamental/technical analysis, investing and trading on short and long timeframes. But the reason why I like the idea, is the emotion/temptation of fiddling with those long term holdings is reduced if you have income being generated regularly from shorter term trades. This is far less likely to have a bad month or year than a rigid buy-and-hold for dividends and value approach, which may take 15-20 years to truly pay off. Instead you also have a strategy that year-to-year maybe you can use to generate a salary. You could feel almost unfazed by pullbacks in a buy and hold account, if you knew it would eventually realise its value, and you had a stream of income from momentum-trading the downwards move. In practice, you’d need to be a jack of all trades, in which case you’d probably not need to diversify your strategy in the first place lol, I dunno.

Investor Comment: We can’t compare today’s modern financial market with that of 1949. In Buffets era, i.e. the last 100 years, we had decades of growth coming from industry. The mass production of the motorcar began in 1914, which fuelled growth in associated infrastructure and business feeding from it. For instance the growth in the oil industry and construction industry lasted for decades. Our M1 motorway wasn’t constructed until the 1960’s. It was the knock on effect of the growth from those businesses that we were able to afford Coca Cola and McDonalds. Unfortunately for us that growth has come to the end of its cycle due to industry moving East and word unheard of when the M1 was under construction. “Globalisation”. What do we have to fuel growth over the next 100 years? In 2012 the FTSE is lower than it was in 2000. No doubt in year 2000 there were bulls calling the FTSE to be 10k by 2012. They are disappointed. Perhaps we will be even lower in another 12 years with nothing to fuel growth. Also in 1949 we weren’t facing the collapse of the European Union under the weight of record levels of sovereign debt in the western economy.

Comment by Dave: If you buy it right in the first place you have nothing to worry about ,so at a car auction the trader doesn’t buy any old crock of shit that goes under the hammer he waits till something is screaming out value, from then on his job is easy because he bought the car at the correct value; this is obviously Buffett’s strength he can value a company which leaves him unperturbed about market noise knowing eventually the cream will come to the top. Of course people who have been in the market the last 5 years are right to be nervous they would have seen share price rise an then get decimated in huge market sell offs, it’s much easier to go risk on than go risk off. Personally I think people get invested and fail to have an exit strategy. This then causes a lot of bad decision making when the stuff hit’s the fan, I’m one that has always stated that you need a bespoke strategy to suit your own individual needs aims and requirements, but it takes a long time before you realise that and that time can often come at a high financial price.

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