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Warren Buffett, Chairman and CEO of Berkshire Hathaway, is perhaps the greatest investor of our time, if not ever.  At buffettologist.com, we have been studying, practicing, and learning from the teachings of the Oracle of Omaha for years.  As such, we have created this blog to share our insights on Mr. Buffett, other Buffett disciples, and value investing.

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Monday, March 30, 2009

The Crocus of Spring

As I was recently thinking about the crocus of spring, the world outside me is again blanketed by a storm of snow.  And while I’m not trying to wax poetical on you (certainly not about investing), this irony does strike me as somewhat indicative of what most have come to expect from today’s market and economy.

Just a few weeks ago, when it seemed like all news was bad news, the market suddenly turned at a right angle and headed up.  The last couple days, it has turned back down.  And, not surprisingly, the myriad of pundits and prognosticators are now arguing if this is simply a bear market rally, or if this is the start of a new bull market.  I suppose they have to find something to talk about.  The real answer, though, in my opinion, is that for long-term investors, it simply doesn’t matter.

The strange thing about what you hear in the world today, is that it seems that the great majority of people seem to be more concerned with “calling” the exact market bottom, or even worse, predicting the daily path of securities prices, rather than focusing on making good long-term investments.  The truth of the matter is that if someone could actually call a market bottom, or know how stock prices will gyrate daily, why on earth would they tell anyone? 

What most people can do, on the other hand, is search for good businesses--those that earn good long-term returns on capital—they understand, wait for them to be at reasonable prices, and then slowly add them to their portfolio.  This isn’t that difficult.  But what it does require, though, is the emotional temperament and stability to resist the temptation to try to “call the bottom”, and to also have the patience and ability to wait for markets to recover.  This, actually, is much more difficult, especially in today’s world, where investors are hit with sensational headlines and media commentary twenty four hours a day, seven days a week.

There is so much noise, in fact, that I’d argue that most investors today can’t seem to see the forest through the trees.  What is more, many seem to react violently to the headline of the day, even when much of this information has already been disseminated (think many of the events surrounding General Motors) to the public and may—or may not--even have an impact on some other businesses.

While I may rail against this mass-market behavior as somewhat irrational, the bright side is that it continues to create opportunity for the long-term investor to opportunistically add good businesses to their portfolio at reasonable (or in some cases great) prices.  This seemingly simple insight seems to be lost on the majority of investors.

I’d like to end this post with one final thought.  A couple of years ago at the Berkshire Hathaway Annual Meeting, Berkshire Vice-Chairman Charlie Munger was asked to give his opinion on the investment climate.  Back then, he said, as I recall (and I’m likely paraphrasing here) that it was not a time to be swinging for the fences.  With the value placed on businesses down, in aggregate, substantially from when he was asked this question two years ago, I wonder what his response this year would be? 

In the spirit of the baseball season soon to begin this spring, here’s to hoping he’ll be asked the same question again this May.

You might also be interested to know that buffettologist.com was recently mentioned in a Marketwatch article, which I’ve linked here.

I welcome dialogue with my readers, so please send me any questions and comments you have.  Also, if you haven’t already done so, please be sure to sign-up for my free email alerts from buffettologist.com by emailing me at Justin@buffettologist.com.

Justin

Copyright © 2009 Buffettologist.com

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business.  This content is intended solely for the entertainment of the reader, and the author. 


11:50 am edt | link 

Friday, March 20, 2009

Why Bigger Isnít Better

For some reason the great majority of people seem to think that bigger is universally better.  Perhaps if you are buying a chocolate muffin (although a nutritionist would argue with me on this point) or drafting an offensive lineman, bigger is, in fact, better.  But if you are investing, on the other hand, I think its much more advantageous to be small fish.

The first--and most obvious reason why this is true--is that the smaller amount of money you have to invest, the greater the universe of opportunities available to you.  Berkshire Hathaway Chairman Warren Buffett mentioned this at the last few annual shareholder meetings, when he said he would be doing a lot different things with his capital if he only had $50 million or less to invest, rather than the billions he has to deploy at Berkshire.  While he is busy looking for elephants, the majority of folks with much smaller amounts of money can spend time looking under the tiniest of rocks for new investment ideas.  This is a huge advantage.

The second reason—although it is closely linked to the first—is that it is much easier for investors with smaller amounts of money to move the needle on their net worth.  A company like Berkshire--or perhaps more poignantly a large mutual fund or hedge fund—can have so much capital, that even when they find a good idea, it will hardly ever have the potential to dramatically increase the overall size of their assets.  Whereas an investor with only 100,000 dollars to invest, could find several opportunities in today’s markets to potentially double the size of her assets.

The irony is that most mutual funds or other asset managers routinely advertise the amount of their firm’s assets under management.  I suppose they believe that the more assets they have—i.e. the bigger they are—will give them the credibility necessary to attract even more assets.  And generally, it does. But, in my opinion, this approach incongruous to generating decent long-term returns, as the bigger these firms become, the more modest their overall results will generally be.  This isn’t just me pontificating.  It is basic mathematics, as size is generally negatively correlated to investment returns.

I’d even take this one step further, and argue that given the role that large financial firms played in the recent market maelstrom, size doesn’t even confer trust to clients anymore.  What matters more, in my opinion, is a personal relationship, and the ability to pick up the phone and talk to someone who explains things plainly and honestly.  It is not about a big brand or a big size, but rather a single relationship that creates trust among clients.  I’d further postulate that now that the tide has gone out on several of the larger firms and money managers, even more folks will find that smaller is, in fact, better.

Now, I’ve painted some large brush strokes, and certainly not everyone is covered.  There are many firms that do limit the size of their assets, which helps to ensure that their universe of potential investments is adequate.  Other firms choose to stay small so that they can better serve their clients, and attempt to keep their returns better than average over the long haul.  I applaud each of these approaches. 

But the real benefactors of being small, in my opinion, are still individuals.  If an individual doesn’t have the time to invest, they can try to seek out the type of firm I’ve just described above.  If an individual does have the time to do the work on their own investments, though, typically looking for smaller companies that one can understand (i.e. within their circle of competence), can help them to produce long-term results that most professional money managers could only dream to replicate.

You might also be interested to know that buffettologist.com was recently mentioned in a New York Times article, which I’ve linked here.

I welcome dialogue with my readers, so please send me any questions and comments you have.  Also, if you haven’t already done so, please be sure to sign-up for my free email alerts from buffettologist.com by emailing me at Justin@buffettologist.com.

Justin

Copyright © 2009 Buffettologist.com

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business.  This content is intended solely for the entertainment of the reader, and the author.


9:06 am edt | link 

Monday, March 9, 2009

The Crisis of Credibility

The accepted mantra in today’s markets is that as a nation we are suffering from a crisis of confidence.  And it is true.  But the root cause of our “crisis of confidence” is, in my opinion, a crisis of credibility.

Over the last several months, countless individuals, organizations, companies, or government officials have taken actions or made statements that sought to reassure investors, only to have these reassurances blow up in their face in the ensuing weeks and months.  While this certainly hasn’t helped to restore confidence, it was also largely out of these folks’ control as their statements where overwhelmed by a tidal wave of economic pessimism.   This has had the unfortunate consequence of causing other credible sources to be leery of making any reassuring statements for fear of also being steam rolled.  Even though this is understandable, this “sitting on the sidelines” mentality further stoked the already rampant fear and panic in markets.

What has been worse, in my mind at least, though, is that the few credible sources that were willing to speak—or had the power to act—have continuously changed their statements or opinions, which have had the unintended consequence of showing how uncertain these “credible” sources really were about what was going on, and what was going to be done about it. In fact, many of these folks might have simply been better off saying nothing, rather than constantly changing their minds, and further fueling the fire of uncertainty.

Credibility is, in fact, acquired when people, or organizations, are consistent in their statements and policies.  In layman’s terms, people become credible, or believable, when they consistently say what they do, and do what they say.  To me, at least, it really doesn’t seem that difficult.  And when someone acts in this manner, it gives them credibility, which then inspires confidence and trust, which I believe, would help to break the negative psychological feedback loop that most markets and investors are currently experiencing today.

One of the reasons I respect Berkshire Hathaway (BRK-A) Chairman Warren Buffett is because, in my opinion, he understands the importance of credibility both for a person and an organization.  I would argue, that one of both Berkshire’s—and Buffett’s—greatest assets is its credibility.  And, thankfully, Buffett is spending some this asset by continuing to stand-up and make appearances—such as he did this morning on CNBC—to reassure markets and citizens about the power of our economic system to create an even better economic future.  I applaud these actions, and I couldn’t agree more with this stance.

But even Berkshire and Buffett has limits to its credibility, which you have seen played out this year.  Buffett’s decision to become more involved with some derivative contracts, especially after warning about their risks for years, has certainly impacted some of Berkshire’s near-term credibility, despite, what I think, are the favorable long-term economic characteristics of these positions for shareholders.  And it appears as though the market recognizes this, as Berkshire’s share price has certainly been impacted over the last year, despite its relatively good performance vis-à-vis many other businesses.

I don’t point this out to be overly critical, but I do think that it illustrates part of the fragility of credibility, and the importance of our leaders (both public and private) to be consistent in both word and action.  In my opinion, this approach will help build credibility, which may inspire more folks (other than only Buffett these days it seems) to make reassuring statements, thereby leading to more confidence and trust, which ultimately will help to break as Buffett says, “the negative feedback loop” we are currently embroiled in today.

You might be interested to know that buffettologist.com was recently mentioned in a Bloomberg article, which I have linked here.

I welcome dialogue with my readers, so please send me any questions and comments you have.  Also, if you haven’t already done so, please be sure to sign-up for my free email alerts from buffettologist.com by emailing me at Justin@buffettologist.com.

Justin

Copyright © 2009 Buffettologist.com

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business.  This content is intended solely for the entertainment of the reader, and the author.


10:30 am edt | link 


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Justin Fuller, CFA provides his market and investment commentary on this website.  Justin has been following and studying Warren Buffett, Berkshire Hathaway, and other leading value investors for years.  If you'd like to be put on his distribution list, or to send him any questions or comments, he can be reached at:  justin@buffettologist.com.

 



The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way.  This content is intended solely for the entertainment of the reader, and the author.