The Buffett Strategy & The Average Investor?

[Real Ray]

http://news.morningstar.com/doc/document/print/1,3651,121436,00.html

Sachin's post reminded me of this-I was curious about how applicable his strategy his to your average individual investor.

The subject of diversity always comes up with Buffett:
About 90% of Berkshire's equity portfolio resides in its top 10 names. That compares with less than 30% for Fidelity Magellan FMAGX--a fairly typical level of concentration for a mutual fund--and 80% for Buffett's friends over at Sequoia Fund SEQUX. Berkshire's top holdings--Coca-Cola, American Express AXP, Gillette, and Wells Fargo WFC--dominate the portfolio. (These are all Buffett stocks, by the way, not Simpson picks.)

Buffett has never been a fan of spreading his bets. Diversification may reduce volatility, but it doesn't necessarily reduce risk. The two concepts are often confused. Volatility can actually help reduce risk because it allows more opportunities for a savvy investor like Buffett to load up on an asset when prices are attractive. Buffett argues that the best way to reduce risk is to focus on companies you know extremely well and companies that boast strong competitive positions. If their earnings or share price happen to bounce around a lot in the short term, who cares?

I'm pretty much in this school with my own portfolio; with two stocks that make up a good part of my portfolio, Anheuser-Busch and Illinois Toolworks, his point about volatility has shown to be spot-on. (I have additional investments in mutal funds, IRA, etc. This is just a personal portfolio of 12 positions that I've been building on for some time.)

Still, I wondered what some people thought about his overall views and to what degree are they applicable to average investors.

Here's the list of his 28 positions at the close of 2004:

American Express AXP: Wide Moat, 3 Stars
Coca-Cola KO: Wide Moat, 5 Stars
Gillette G: Wide Moat, 2 Stars
Wells Fargo WFC: Wide Moat, 3 Stars
Wesco Financial WSC: Narrow Moat, 3 Stars
Moody's MCO: Wide Moat, 2 Stars
Washington Post WPO: Wide Moat, 3 Stars
Petrochina Company PTR: Narrow Moat, 1 Star
H&R Block HRB: Wide Moat, 3 Stars
M&T Bank MTB: Narrow Moat, 3 Stars
HCA HCA: No Moat, 1 Star
Nike NKE: Narrow Moat, 2 Stars
Shaw Communications SJR: Not Rated
First Data FDC: Wide Moat, 4 Stars
Gap GPS: Narrow Moat, 4 Stars
Gannett GCI: Narrow Moat, 3 Stars
Costco Wholesale COST: Narrow Moat, 3 Stars
USG USG: Not Rated
Iron Mountain IRM: Wide Moat, 5 Stars
Comcast CMCSA: Wide Moat, 3 Stars
Pier 1 Imports PIR: No Moat, 3 Stars
American Standard Companies ASD: No Moat, 2 Stars
Torchmark TMK: Narrow Moat, 2 Stars
Outback Steakhouse OSI: No Moat, 3 Stars
Mueller Industries MLI: Not Rated
ServiceMaster SVM: Narrow Moat, 1 Star
Sealed Air SEE: Narrow Moat, 3 Stars
Comdisco Holding Company CDCO: Not Rated

[Andy_B]

7 years ago, I would have liked his theory but things have happened in the industry that make me scared to have too much money in any one stock.

Its not that I am afraid that a company would have wild swing in their revenue or expenses, its more the fact that one idiot can "Enron" a company and leave an investor holding the bag.

This is a "risk" I never would have considered too heavily in the early 90's and yet I think this is a new risk that needs to be thought about when investing in only a couple of stocks.

Andy

[Footer Phooter]

Its not that I am afraid that a company would have wild swing in their revenue or expenses, its more the fact that one idiot can "Enron" a company and leave an investor holding the bag.


Andy

That takes several idiots. Not a lot, but more than one.

[Andy_B]

That takes several idiots. Not a lot, but more than one.

fair point. I guess what I really meant to say was that the risks are outside of just how the business itself performs.

Andy

[bostonsoccermdl]

fair point. I guess what I really meant to say was that the risks are outside of just how the business itself performs.

Andy

Well, one of the biggest problems I have seen for the average investor is to get whipsawed out of their holdings.. It doesnt matter how good the company is if the institutional holders and hedge funds are pounding the stock...

I have seen great companies with great prospects plummet on rumors and panic selling, only to rebound to the sky after a few months... The average joe, cann no longer take the pain, sells right into the temporary bottom..

[VFish]

Bought Berkshire-B pre bubble burst and am up big (only wish I'd bought more). Rather than play the strategy why not let the World's best investor do it for you?

[stopper4]

That takes several idiots. Not a lot, but more than one.

Tell that to Martha's shareholders.

[stopper4]

Bought Berkshire-B pre bubble burst and am up big (only wish I'd bought more). Rather than play the strategy why not let the World's best investor do it for you?

Because now that everyone know's he's the world's best, he's overpriced?

[erikl2]

Well, one of the biggest problems I have seen for the average investor is to get whipsawed out of their holdings.. It doesnt matter how good the company is if the institutional holders and hedge funds are pounding the stock...

I have seen great companies with great prospects plummet on rumors and panic selling, only to rebound to the sky after a few months... The average joe, cann no longer take the pain, sells right into the temporary bottom..

I think that that only reemphasizes Buffett's point. Only invest in what you know. Then invest with conviction.

Bought Berkshire-B pre bubble burst and am up big (only wish I'd bought more). Rather than play the strategy why not let the World's best investor do it for you?

Buffett is old. He's chosen Lou Simpson to take over for him, but Lou only invests GEICO's investment portfolio. He's still pretty good, but he's not Buffett.

7 years ago, I would have liked his theory but things have happened in the industry that make me scared to have too much money in any one stock.

Its not that I am afraid that a company would have wild swing in their revenue or expenses, its more the fact that one idiot can "Enron" a company and leave an investor holding the bag.

This is a "risk" I never would have considered too heavily in the early 90's and yet I think this is a new risk that needs to be thought about when investing in only a couple of stocks.

Andy

Buffett would (and has) argued that you should have uncovered many of these shenanigans before you made your investment. In fact, should only consider an investment after properly researching a company.

[Andy_B]

Buffett would (and has) argued that you should have uncovered many of these shenanigans before you made your investment. In fact, should only consider an investment after properly researching a company.

I don't think its fair to expect regular people to uncover shenanigans when many of the full time, highly paid fund managers could not even uncover them.

Andy

[VFish]

Buffett is old. He's chosen Lou Simpson to take over for him, but Lou only invests GEICO's investment portfolio. He's still pretty good, but he's not Buffett.And he was old in 2000 when I bought. I'm not worried about something happening to Warren... and God forbid if something did happen I imagine I'd increase my position since the "Buffet premium" would be removed from the stock price.

[erikl2]

I don't think its fair to expect regular people to uncover shenanigans when many of the full time, highly paid fund managers could not even uncover them.

Andy

Your right, it's not fair. But if you want to hold non-diversified equity positions (and make money) many would argue that it is necessary. Otherwise buy the index and enjoy a "safe" return.

Very few fund managers actually do or have staff do research into companies' financial statements. They are far too busy trying to mimic the S&P 500. It is not possible to look indepth into the number of positions that most mutual funds have. This is typically the realm of hedge funds.

That being said, people did find problems with Tyco, Worldcom, Enron, and Adelphia all long before the market realize it. Sixty minutes even did a couple of pieces on Worldcom. It's possible, it just requires work. A good starting point is Financial Shenanigans by Howard Schilit

[bostonsoccermdl]

I don't think its fair to expect regular people to uncover shenanigans when many of the full time, highly paid fund managers could not even uncover them.

Andy

Bingo. What many dont realize is that there is an information network that exist where these PM's make decisions off of. They spin it however they like, but many decisions are based off of inside information. Like it or not, they do it.
"SAC" one of the most successfull hedge funds based out of CT, prides themselves on information. They get the FIRST call from the BEST analysts and act on it b/4 anyone else has it. read this..........
http://webuser.bus.umich.edu/Organizations/investmentclub/SAC.doc

[Real Ray]

http://story.news.yahoo.com/news?tmpl=story&cid=509&ncid=509&e=27&u=/ap/20050421/ap_on_bi_ge/anheuser_busch_buffett

In recent months, Niemann said, Buffett increasingly has become bearish on the market and more defensive in his holdings, perhaps tapping a stake in the nation's leading brewer because "he wants something that's not going to give him an upset stomach."


"They know brewing and they stick to brewing," she said, attributing Anheuser-Busch's stock spike Thursday to what Wall Street often calls the "Buffett blessing." "I would think at this point that Anheuser-Busch is sitting there smiling, feeling wonderfully self-validated."

Well, if you see my first post...:) Thanks WB

[VFish]

http://story.news.yahoo.com/news?tmpl=story&cid=509&ncid=509&e=27&u=/ap/20050421/ap_on_bi_ge/anheuser_busch_buffett



Well, if you see my first post...:) Thanks WBThis Bud's for you!

[christopher d]

In fact, should only consider an investment after properly researching a company.You mean... determine an actual value of the company by opening up its financial statements and doing some valuations, investigate both its and its industry's outlook, and see if you're buying something for close to what it's actually worth? Where's the fun in that?