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reddingrunner (92.04)

Buffet was wrong!



April 08, 2013 – Comments (15) | RELATED TICKERS: BRK-B

Or maybe even he has changed his mind by now.  I don't know.

What I do know is that the strategy of buying and holding "forever" doesn't make any sense.

You can make money by buying undervalued stocks, holding them for as long as it takes until their price reflects their value (or better yet, they become over-valued), but why keep holding them after that?

If you only buy stocks that are under-valued, what is the advantage in holding onto that stock once it becomes over-valued?  

And if you love the management and business plan today, who's to say they will be any good 20 years from now?  

Best case scenario: buying undervalued stocks and holding them forever will give you the potential for a short-term gain (5 years or however long it takes for the market to realize the hidden value) and will give you "market perform" after that.  

Maybe this is why B-H is beginning to perform as a surrogate index fund? 

As a general rule I'm not smarter than Warren.  So what am I missing here? 

15 Comments – Post Your Own

#1) On April 08, 2013 at 5:15 PM, L0RDZ (91.04) wrote:

Buffey's  first rule is   to never  lose money in  stocks...

The holding forever makes  sense  in  the  fact  that  Buffey  makes extremely large  purchases   and  in many  cases  has stocks  that  pay  dividends,   yet  the  stock   he allows  others  to  participate  in his  investments  does  not...

So  he  makes  a killing  owning  coke  meanwhile  those who  try  to tag  along  by  buying  shares  100k plus  shares of  BRK-A  or  the  hundred  dollar  non  voting brk-b   are  basically  SOL  if   they  need to  sell  and  the  current  price is  less or  in some  cases way less  than  when  they   bought...

Lets  face  it...  the stocks  he buys  can  get a  huge  pop  at  the mere  suggestions  he's  buying  and  just him buying with all  the  billions  he has  available  to him  just by  the  law  of  gravity  makes whatever  he  buys  go  up  in  value...

IE  he  could  buy  tulips  and  just by  the money he'll throw  around and  the  sizes  tulips  will  suddenly  become  more expensive...

Or  say  he  buys  some  newspaper  or  some  other  dying industry.

Heaven  forbid he  really  messes up  and  fools  up  with all his derivative  plays  and  insurance  deals...  his  good  old  Uncle  will step  in  to rescue  the  too big  to  fail  industries  he's  in  like  banking...  insurance...  etc...

All the while  any  peasants who  buy any  BRK  will never  see any dividends...

All  the  while  he  will be  offered  and  made  available  to  him  special  deals  that  no one else  gets...

Case  in point  his  special  GE  10%  dividends  and  GS  10%  dividends..


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#2) On April 09, 2013 at 1:42 AM, valuemoneygreen (50.47) wrote:

Take a look at my CAPS page and read all the comments. It will help you understand. He is buying undervalued companies but they are also great companies. I am not ending any of my picks for the most part. Look at the returns. Then go back 5 years from now and look at the returns. They might look impressive now but in 10 years they will look REALLY impressive I would bet. If you are just buying cheap companies that don't have a competive advantage YOU ARE RIGHT in what you are saying but if you buy companies like KO with historic high returns on capital it will be a gift that keeps giving. More and more and more. I only track so many companies. The rest are not even worth buying in my opinion.

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#3) On April 09, 2013 at 2:34 AM, Valyooo (33.89) wrote:

For the most part you are right, and I share your philosophy.  But when you are investing billions at a time, you can't trade in and out, so its easier to stick with one company

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#4) On April 09, 2013 at 11:49 AM, chk999 (99.96) wrote:

The missing piece of the puzzle is that Buffet wants to buy undervalued companies that have a high return on incremental capital. Suppose that the company can invest new capital at a rate of 20%. And suppose that it pays out 50% in dividends? That company will grow at 10% per year compounded forever. And pay out the dividends. Buying and holding forever companies that have mediocre return on new capital doesn't make a lot of sense, But that's not the game that Buffet is playing.

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#5) On April 09, 2013 at 12:06 PM, ikkyu2 (98.17) wrote:

Buffett never told you or anybody to buy and hold a company forever.  In fact he thinks the average retail investor should just own an S+P index fund.

Recently his fund bought Intel between 20 and 21.  A quarter later all the stock was sold around 27.  The stock was undervalued according to future prospects; it became overvalued according to future prospects (even I could see that, check my CAPS blog) and  it was sold.

What Buffett and his proteges do better than you or I is evaluate a company's value according to its future prospects, not its past performance or today's 'ratios'.  When he thinks a stock is undervalued compared to how it will perform in the future - relative to other investments he could be holding with that money - he holds it.  When he doesn't, he sells it.  And he sells all kinds of things; check his 10-Q's.

Buffett is on record stating that he does not expect BRK to outperform in future.  This is a smoke screen to conceal the fact that a BRK investment in a company has public relations value and that companies with image problems (BAC, GS, GE) are willing to pay a substantial premium for funds if they originate from BRK and the transaction is publicized.  L0RDZ (comment #1 above) appears angry about that but to me it is what it is, no point in getting upset about it but important to understand it. 

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#6) On April 09, 2013 at 2:00 PM, somrh (82.00) wrote:

Here's a few observations:

I concur with valuemoneygreen and chk999 that part of the issue is high return on capital. To quote Munger:

"Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result."

In some sense, what many refer to as "value investing" is more or less mean reversion. It's predicated that at one moment a stock will trade at one multiple (PE, EV/EBIT, etc) and that at another moment (preferably a short time) it will trade at a different multiple. So you have to believe that the market is wrong but will get it right really soon (if not, you're not going to do much better than the underlying business which may do lousy overall.)

I don't think valuation is all that precise to begin with. If I have a stock I'm looking at, I might think it's worth, say, $40 +/- $10. So if it's trading anywhere between $30 and $50, it's "fair valued" as far as I'm concerned. I like to buy on the low end ("margin of safety"). But the stock may never get too expensive. Sure you can play the volatility but I wouldn't call that value investing... something else perhaps (Valyoo has a blog related to this.)

It's not like we have the precision of a physicist. We're pulling numbers out of our asses to figure out what future cash flows may or may not be and slapping a price tag to those cash flows. 

And I think Valyooo is probably correct that there's a size issue. 

Here are a couple of other observations:

1) Buffett's cost basis is roughly $0 (relatively speaking) for many of his positions. So if he sells them he has to pay taxes on the capital gains which would be, more or less, a 35% immediate set back. So he'd not only have to justify that the stock was overpriced, but that it's overpriced enough and there's a good enough alternative that will not only outperform that stock, but make up for the immediate 35% hit.

2) There's an information cost that needs to be factored in. For a company Berkshire's size, it's probably not a huge issue but it is for an individual investor. Suppose you have a stock that you've owned for x # of years, you've already spent a good deal of time reading financials and news about the company. If you sell out, you give up a company you know a good deal about and do what? buy into a company that you likely know a good deal less about?

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#7) On April 09, 2013 at 4:35 PM, awallejr (36.64) wrote:

I don't understand where people are getting this "buy and hold forever" thesis from.  Buffett certainly doesn't say that. Now you can buy and hold, but that doesn't mean forever.  You try to find companies that you think will be around for a long time, but events change.


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#8) On April 09, 2013 at 4:44 PM, Schmacko (91.07) wrote:

@ #7 It's probably from this famous Buffett quote:

"Our favorite holding period is forever." - Warren Buffett

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#9) On April 09, 2013 at 4:49 PM, Schmacko (91.07) wrote:

More specifically its from this 1988 letter to shareholders 

Relevant excerpt with quote highlighted:

o In 1988 we made major purchases of Federal Home Loan
Mortgage Pfd. (“Freddie Mac”) and Coca Cola.  We expect to hold these securities for a long time.  In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.  We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint.  Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds.  Our holdings of Freddie Mac are the maximum allowed by law, and are extensively described by Charlie in his letter.  In our consolidated balance sheet these shares are carried at cost rather than market, since they are owned by
Mutual Savings and Loan, a non-insurance subsidiary.

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#10) On April 09, 2013 at 5:23 PM, constructive (99.96) wrote:

Berkshire owned Freddie Mac for 12 years, with a pretax internal rate of return around 26%. Then he changed his mind about it and sold, a smart decision.

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#11) On April 09, 2013 at 7:03 PM, awallejr (36.64) wrote:

Except his point is being taken out of context.  When I buy I plan on holding them for a long period of time, but that doesn't mean if the thesis changes against the holding I will refuse to adjust.  As he said:

We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint.

He is no fool, if the business disappoints he will adjust.

It is really called, "buy, hold and monitor."

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#12) On April 09, 2013 at 7:57 PM, reddingrunner (92.04) wrote:

Thanks for all the great comments.  I suspect that he was using hyperbole when he said, "forever".  But I think the game has changed since everything has become computerized.  Any company that is truly undervalued won't stay that way for long.  As to what the best holding time is, I'm still searching.  

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#13) On April 09, 2013 at 10:58 PM, Valyooo (33.89) wrote:

Buffett also called derivatives financial weapons of mass destruction, but he has a huge derivative portfolio

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#14) On April 10, 2013 at 1:03 AM, awallejr (36.64) wrote:

What's the old saying?  They have their nuclear weapons, so I have mine?

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#15) On April 10, 2013 at 1:08 AM, shamapant (< 20) wrote:

he actually wasn't using hyperbole when he said "forever". What he was saying is that if you buy a company like KO at a fair multiple on book, and they achieve ROEs of 30% annually, and you can sell it at the same multiple(because the quality of the business is so high), you'll achieve amazing returns seemingly "forever," or at least as long as any investor really needs. The trick is finding a company and a price at which this works. And that's why Buffett's special. Read his letters if you really want answers.

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