Posted by Don Martin on Thu, Feb 14, 2013 @ 04:04 PM
Valentine’s Day and investing
|
Investors’ greatest mistake is falling in love… with flashy, glamorous stocks, instead of buying stocks in boring, nerdy industries. An example of a good way to invest is how Buffett invests. His picks include boring things like a freight railroad, Walmart, and now he’s buying Heinz foods. There is nothing exciting in his portfolio. By contrast, the industries that retail investors hurt themselves with are tech stocks and airlines. The investors’ desire to own an exciting industry causes investors to overpay for those stocks. Buffett dislikes and doesn’t own tech stocks or airline stocks.
Here in Silicon Valley I have seen tech companies become very popular only to see them fall back to earth after a few years.
Investors overpay for Growth stocks because they fall in love with them. By contrast, Value stocks often have some unattractive, boring aspect that caused them to be available at more reasonable prices.
Investors should be choosing stocks based on the company’s financial statements and financial ratios, plus marketing prowess (such as “moats”) and not on glamour factors like tech or airlines or consumer fads.
I remember in the tech bubble of 2000 a friend, not a client, put 98% of his money into four tech stocks and 2% in Heinz. I tried to warn him to diversify and to completely avoid tech stocks but he wouldn’t listen. He lost 80% of his portfolio during the tech crash and had to deal with other hardships because of that. So when I heard today that Buffett is buying Heinz it reminded me of the mistake made by that investor who fell in love with tech stocks at precisely the moment they were very overpriced.
I have written an article about Buffett’s investing style “What’s a secret type of call option?”
Investors should seek independent financial advice.
Posted by Don Martin on Tue, Dec 04, 2012 @ 09:04 AM
Is the asset cash really a call option?
|
An interesting article on 9-25-2012 in the Toronto Globe titled “For Warren Buffett, the cash option is priceless” mentioned that Warren Buffet views cash not as a dead weight asset but rather as a Call option on the future purchase of an asset. The logic is that by hoarding cash when it pays almost nothing and waiting, eventually there will be a crash and you can then buy something at a low price.
OK, so it is not really a call option since you have no idea what the price will be or what asset will become available. But think of it this way: you move to an expensive city and hoard enough cash to buy a house and rent for a while. You don’t know whose house will be sold at a fire sale price or when the next recession will be but you do know you have to prepare for opportunity of buying a home at the right price.
The key to Buffett’s insight is to view the potential profit from having cash ready to buy a great asset at a low price during crash is far greater than the opportunity cost of holding cash. In other words don’t let the zero yield on cash bother you. Investors who buy high risk stocks, commodity futures, options, etc. learn not to get bothered by the risk of loss, so why should you be bothered by the risk of loss associated with the mere opportunity cost of holding cash instead of holding a higher yielding asset? Surely suffering opportunity cost is less of problem that suffering actual losses from holding a losing investment.
I have written an article “Bear forecasts a bullish stock market”.
Investors should seek independent financial advice.
Posted by Don Martin on Thu, Mar 03, 2011 @ 02:22 PM
Berkshire Hathaway, Warren Buffett’s company, recorded a write-down of 48% of the value of a junk bond the company purchased in 2007. The bonds were purchased at a discount and yielded 10% when purchased. They were issued by a utility company. The story was reported in an article Battered Bonds a Berkshire Blemish by Serena Ng in the WSJ on 3-3-11.
My point is that junk bonds are bad because the downside risk is they go down like equities but the upside is that you can’t make appreciation as much as equities. See my posts about junk quality bonds here and here.
This is why investors need independent investment advice.