Speculation mistaken for Reasoned Analysis

I have watched over the years as many believe the words of those who they think “know” what is going on in the markets, yet in all reasoned analysis they have no more a clue than you or I.

Take for example Warren Buffett. A dottering old man who lives in the same house as he was born in, lives – according to the marketing machine called ‘Buffett” a very humble life, nothing has changed for him other than being worth 10’s of billions. So, what’s the appeal? It’s like Miss Marple, she seemed harmless and so those around her took her into their confidence. Buffett seems the same to me, he speaks and everyone listen’s. Yet to what? Over the past 12 months (and longer) he has been talking up the US economy, yet we all know it’s a basket case ready to topple over. If it wasn’t for the fact that the $US is woven into so many daily facets of the world economy it would have been dumped and treated with the same distain as Greece is currently feeling long ago. Yet Buffett speaks and markets move. Where is the declaration of self interest in all this? Where is the reasoned analysis to suggest he is right and all others are wrong? If Buffett says all is well and markets go up the self-serving interest is meet by the price, and hence value of his company rises.

Analysis has been done and Buffett is right when the market is moving up and he is wrong when the market moves down. He has underperformed the market over the past 20 yrs (since 1993), however the loss seems less because he doesn’t take big risk’s, hence the value doesn’t decline as it would as if he was ‘really’ out there making money.

Steve Jobs is another. Apple have a product – a pretty ordinary one in all respects, however the technology and the future applications are brilliant, yet when he speaks so few seem to ask the important questions. He says the future is bright and the Apple share price goes up and all is well for the future: it’s bright. The same use to be said Micro-soft yet those heady days are long behind us. Google is another.

This is not to say those mentioned and others don’t have the right to speak out and express their views, by all means please do so. Yet when you have the ‘cult’ following of a Buffett then those who listen should be asking more questions of him, not less. Some of you may argue that Buffett et al. is no different from a politician talking up an economy etc. yet they have significantly more scrutiny thrown at them. Look at Sawn, appalling as he is as Treasurer, he can’t mention a single $ value without headlines the next day proclaiming brilliance, or more so in his case farcical ineptness.

Just because someone says it’s so doesn’t mean it is. When will real critical analysis be sort, and in fact demanded when those who people apparently respect actually wake p and say … “Ohhh, could you provide some evidence for your statement?”

bob99 said:

Just because someone says it’s so doesn’t mean it is. When will real critical analysis be sort, and in fact demanded when those who people apparently respect actually wake up and say … “Ohhh, could you provide some evidence for your statement?”

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Buffett has an excellent track record applying the value investing principles he learned from Ben Graham and others to selecting quality businesses to purchase. He is intelligent but not a genius and has been primarily U.S. centric in his investment focus. The U.S. financial media idolize him (CNBC for instance) as an investment guru with the track record to prove it. That's ok to a point but I must say I find him to be unimpressive as a public speaker.

Problem is that the media prod Buffett to comment on areas outside of his expertise such as macro economics - he's not, never has been or ever will be qualified to comment on macro economics. He's essentially a business analyst/investor who buys entire businesses that fit his criteria with some (like Sees Candy) being terrific long term performers. His U.S. centric focus though has not been visionary in light of the rise of Asia and the drastic decline in the U.S. economy.

As for his frugal lifestyle even though a billionaire, I tend to agree that it's just a little strange to make one's lifelong focus the acquisition of companies and wealth while enjoying so little of the lifestyle that such wealth can provide. The money is clearly secondary and competing in the arena of capitalism is what really motivates him. Giving away his entire fortune to the Gates Foundation is evidence of this casual attitude toward money and acquired wealth.

I think I know what you're saying here bob.

This is the way I see it: people in positions of power and authority have a responsibility to encourage optimism and positivity. After all it's a good thing. As an individual, if I have a positive mindset, then my 'natural' inclination when reading charts will be to gravitate (often unconsciously) towards stocks that will make me money. So all Buffet/Jobs and co. are saying 'try to be positive', because they knows it works as a general rule.

As a trader, I have to balance this against the fact that I cannot control other people.... and herein lies a problem - those same 'other people' make up the market, and they decide what happens to the stock I just bought. All I can do is control myself.

So Buffett looks at the economy and knows it's up the creek, but he also knows that the only way to get ahead is to be reasonably positive as an individual. The reality doesn't necessarily have to dictate your mindset.

If my stock is getting sold off hard, a positive mindset will say sell. Selling a stock that is obviously about to get smashed is a positive move. I complain about bots and insto manipulation a bit in here. A truly positive mindset will acknowledge the manipulation, point it out, and either move with the fund or steer clear. Sometimes I can do this, other times I get caught.

Buffett might be better saying: "Things are stuffed in our economy, but for me personally, I know how to stay positive, and that's how I've been so successful. What you do for yourself won't bother me too much because I know what I'm doing!"

Just to add this -

IMO, a good mindset or belief structure would be along the lines of "I can see opportunities clearly, so I know when to buy and when to sell. When I'm not feeling optimistic, I stay out of the market. I can make good money trading/investing this way". Then you work accordingly.

IMO, a dangerous belief structure would be along the lines of "I believe in this company and it will make me rich; all I have to do is believe", because what that does it place a filter on reality, meaning that you will ignore bad news or negative chart patterns. The first approach also filters reality but does so in a much safer way. It's also easier to apply in that it's flexible and it puts the emphasis back on you.

Gringotts Bank said:

IMO, a good mindset or belief structure would be along the lines of "I can see opportunities clearly, so I know when to buy and when to sell. When I'm not feeling optimistic, I stay out of the market. I can make good money trading/investing this way". Then you work accordingly.

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I've never seen that sort of training on any trading desk.

Everyone has a set of beliefs about the market and their ability to profit from it, whether they talk about it or not. And this is the very reason why 100 traders of equal intelligence and training will achieve vastly different results trading exactly the same system.

Optimism, pessimism or supposed realism. Take your pick.

bob99 said:

“Ohhh, could you provide some evidence for your statement?”

He has underperformed the market over the past 20 yrs (since 1993)

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Do you have any info regarding this. Links, websites, etc.

Thanks.

bob99 said:

1, Take for example Warren Buffett. A dottering old man who lives in the same house as he was born in,

2, Yet to what? Over the past 12 months (and longer) he has been talking up the US economy, yet we all know it’s a basket case ready to topple over.

3, Yet Buffett speaks and markets move. Where is the declaration of self interest in all this? Where is the reasoned analysis to suggest he is right and all others are wrong?

4, If Buffett says all is well and markets go up the self-serving interest is meet by the price, and hence value of his company rises.

5, Analysis has been done and Buffett is right when the market is moving up and he is wrong when the market moves down.

6, He has underperformed the market over the past 20 yrs (since 1993), however the loss seems less because he doesn’t take big risk’s, hence the value doesn’t decline as it would as if he was ‘really’ out there making money.

7, Yet when you have the ‘cult’ following of a Buffett then those who listen should be asking more questions of him, not less.

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From reading your post I am confident that you do not know enough about Buffett or hes investment principles to pass judgement.

1, He does not still live in the house he was born in.

2, He has constantly said he has no idea where the economy will go short term, But he is extremely bullish long term, He doesn't make investments hoping for short term capital growth instead he buys businesses with the belief that over time through all vissitudes the will contiune to tick along, earning profits.

3, No, the market generally scoffs at him and says he entered to early, Not that he cares. If he gets a chance to by a good business at a discount he will do it regardless of what the media say will happen in the short run.

4, Buffett has always made statements that he does not judge himself on the market value of berkshire hathaway, but rather by it's book value and earnings per share.

5, Buffett is neither right or wrong because the market moves up or down, He is right or wrong depending on the earnings his investments generate over the years.

6, The Book Value of berkshire hathaway has never underperformed the market when measured over a rolling 5 year basis. Warren Has stated that if he ever underperforms the market over a rolling 5 year period he will start paying dividends and begin a wind down of the company.

7, Yes they should, But the nay says should also look a bit more deeply into why he genuinely believes the things he says.

ENP said:

Do you have any info regarding this. Links, websites, etc.

Thanks.

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BRKA vs SP500

http://imageshack.us/photo/my-images/684/brka.jpg/

Look like he outperform it by a large margin

Here is an interesting document if you want to learn more about buffetts core beliefs,

The Berkshire hathaways owners manual.

In June 1996, Berkshire’s Chairman, Warren E. Buffett, issued a booklet entitled “An Owner’s Manual*” to Berkshire’s Class A and Class B shareholders. The purpose of the manual was to explain Berkshire’s broad economic principles of operation. An updated version is reproduced on this and the following pages.
OWNER-RELATED BUSINESS PRINCIPLES
At the time of the Blue Chip merger in 1983, I set down 13 owner-related business principles that I thought would help new shareholders understand our managerial approach. As is appropriate for “principles,” all 13 remain alive and well today, and they are stated here in italics.
1. Although our form is corporate, our attitude is partnership. Charlie Munger and I think of our shareholders as owner-partners, and of ourselves as managing partners. (Because of the size of our shareholdings we are also, for better or worse, controlling partners.) We do not view the company itself as the ultimate owner of our business assets but instead view the company as a conduit through which our shareholders own the assets.
Charlie and I hope that you do not think of yourself as merely owning a piece of paper whose price wiggles around daily and that is a candidate for sale when some economic or political event makes you nervous. We hope you instead visualize yourself as a part owner of a business that you expect to stay with indefinitely, much as you might if you owned a farm or apartment house in partnership with members of your family. For our part, we do not view Berkshire shareholders as faceless members of an ever-shifting crowd, but rather as co-venturers who have entrusted their funds to us for what may well turn out to be the remainder of their lives.
The evidence suggests that most Berkshire shareholders have indeed embraced this long-term partnership concept. The annual percentage turnover in Berkshire’s shares is a fraction of that occurring in the stocks of other major American corporations, even when the shares I own are excluded from the calculation.
In effect, our shareholders behave in respect to their Berkshire stock much as Berkshire itself behaves in respect to companies in which it has an investment. As owners of, say, Coca-Cola or American Express shares, we think of Berkshire as being a non-managing partner in two extraordinary businesses, in which we measure our success by the long-term progress of the companies rather than by the month-to-month movements of their stocks. In fact, we would not care in the least if several years went by in which there was no trading, or quotation of prices, in the stocks of those companies. If we have good long-term expectations, short-term price changes are meaningless for us except to the extent they offer us an opportunity to increase our ownership at an attractive price.
2. In line with Berkshire’s owner-orientation, most of our directors have a major portion of their net worth invested in the company. We eat our own cooking.
Charlie’s family has 80% or more of its net worth in Berkshire shares; I have more than 98%. In addition, many of my relatives – my sisters and cousins, for example – keep a huge portion of their net worth in Berkshire stock.
Charlie and I feel totally comfortable with this eggs-in-one-basket situation because Berkshire itself owns a wide variety of truly extraordinary businesses. Indeed, we believe that Berkshire is close to being unique in the quality and diversity of the businesses in which it owns either a controlling interest or a minority interest of significance.
Charlie and I cannot promise you results. But we can guarantee that your financial fortunes will move in lockstep with ours for whatever period of time you elect to be our partner. We have no interest in large salaries or options or other means of gaining an “edge” over you. We want to make money only when our partners do and in exactly the same proportion. Moreover, when I do something dumb, I want you to be able to derive some solace from the fact that my financial suffering is proportional to yours.
3. Our long-term economic goal (subject to some qualifications mentioned later) is to maximize Berkshire’s average annual rate of gain in intrinsic business value on a per-share basis. We do not measure the economic significance or performance of Berkshire by its size; we measure by per-share progress. We are certain that the rate of per-share progress will diminish in the future – a greatly enlarged capital base will see to that. But we will be disappointed if our rate does not exceed that of the average large American corporation.
4. Our preference would be to reach our goal by directly owning a diversified group of businesses that generate cash and consistently earn above-average returns on capital. Our second choice is to own parts of similar businesses, attained primarily through purchases of marketable common stocks by our insurance subsidiaries. The price and availability of businesses and the need for insurance capital determine any given year’s capital allocation.

In recent years we have made a number of acquisitions. Though there will be dry years, we expect to make many more in the decades to come, and our hope is that they will be large. If these purchases approach the quality of those we have made in the past, Berkshire will be well served.
The challenge for us is to generate ideas as rapidly as we generate cash. In this respect, a depressed stock market is likely to present us with significant advantages. For one thing, it tends to reduce the prices at which entire companies become available for purchase.


Entire doc here
http://www.berkshirehathaway.com/ownman.pdf

Buffet has no reason to "talk up" the market. He and all investors profit more greatly over long periods by markets going down.

Here is a vid where buffet explains this theory in 3mins

.

ROE said:

BRKA vs SP500

http://imageshack.us/photo/my-images/684/brka.jpg/

Look like he outperform it by a large margin

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Entry date, price and holding time period are everything for the purpose of such a comparison. BRKA is at the same price level now as it was 3 years ago at around $113,000. That's no capital gain or dividend in 3 years, some investment!

The S&P 500 index is up 100% since June09 while BRKA is up just over 50% over the same period.

If you had invested in BRKA in Sept 1998 and held until Feb2009 you would have had no capital gain or dividend income over a period of 10.5 years! In fact, since 1998 BRKA is up a modest 40% (+$33,000 on an initial investment of $80k) to date, 13 years.

Let's assume that you would have achieved an average of 5% annually (very conservative estimate) in bank interest on that $80k investment over 13 years. Your profit would then have been +$73k in interest. That's a whopping $40,000 more than the same investment in BRKA over the same period. So just how wonderful is your investment with Warren Buffett and Co (value investor extrordinaire) over more than a decade, half what you would have earned in bank interest.

So much for buying and holding BRKA for the last 13 years! Anyone still think that Buffett is generating extraordinary returns from his extraordinary businesses? Still think that investing $113,000 for one share of BRKA is a good investment? Think again.

Tysonboss1 said:

2, He has constantly said he has no idea where the economy will go short term, But he is extremely bullish long term,

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Whacko!!! We can all be 'extremely bullish long term' when we're not required to nominate the length of that term. What does "long term" constitute?

Thanks to FX for outlining some reality here.

I'm curious about why Mr Buffet inspires the sort of non-objective devotion amongst his disciples that he does.

Julia said:

I'm curious about why Mr Buffet inspires the sort of non-objective devotion amongst his disciples that he does.

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Warren has some Fanbois that's for sure. its a fact that "value" investing gets popular after big market declines...when "value" is easier to find.

FxTrader said:

Entry date, price and holding time period are everything for the purpose of such a comparison. BRKA is at the same price level now as it was 3 years ago at around $113,000. That's no capital gain or dividend in 3 years, some investment!

The S&P 500 index is up 100% since June09 while BRKA is up just over 50% over the same period.

If you had invested in BRKA in Sept 1998 and held until Feb2009 you would have had no capital gain or dividend income over a period of 10.5 years! In fact, since 1998 BRKA is up a modest 40% (+$33,000 on an initial investment of $80k) to date, 13 years.

Let's assume that you would have achieved an average of 5% annually (very conservative estimate) in bank interest on that $80k investment over 13 years. Your profit would then have been +$73k in interest. That's a whopping $40,000 more than the same investment in BRKA over the same period. So just how wonderful is your investment with Warren Buffett and Co (value investor extrordinaire) over more than a decade, half what you would have earned in bank interest.

So much for buying and holding BRKA for the last 13 years! Anyone still think that Buffett is generating extraordinary returns from his extraordinary businesses? Still think that investing $113,000 for one share of BRKA is a good investment? Think again.

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Easy to pick and chose in hind-insight if you think you can annually compounding 20% average a year on your portfolio you can be a very very rich man due to the law of compounding.

Many people talk a lot with their pretty graphs and wording not many can match the long term performance

also remember making 20% return on 10B is a lot harder than making 20% on 1 million.

have a look at Warren record way back when he has less money and unknown...30%-40% return annually isn't unusually for him.

Julia said:

I'm curious about why Mr Buffet inspires the sort of non-objective devotion amongst his disciples that he does.

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Everyone wired differently... Investing is like Fashion style.
you pick the one that suite you and you either stay with it
or you change style each year.

You not going to get thousand of people from all walk of life
settle for one investment style.

It will be like that property thread and on it goes for eternity

same stuff surface every few months, getting pretty boring after a while
TA vs FA v EMT vs Warren vs etc.

ROE said:

Easy to pick and chose in hind-insight if you think you can annually compounding 20% average a year on your portfolio you can be a very very rich man due to the law of compounding.

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I selected the performance of BRKA for the last 13 years which is much longer than the investment horizon of the majority of investors, even those with a buy and hold bias. Showing the performance of BRKA over 20 or 40 years is simply not as relevant to an investor who must fork out $113,000 for one share of BRKA today. Your reference to the "law of compounding" is of no comfort to investors in Buffett's BRKA for the last 13 years.

Many people talk a lot with their pretty graphs and wording not many can match the long term performance

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Ah, you also have chosen to use the vague, nebulous and over used phrase "long term performance" without a context. Long term for me is 5+ years, but means something different to each individual. 13 years of significantly underperforming bank interest is poor "long term performance" in my view and I suspect many would agree with me.

also remember making 20% return on 10B is a lot harder than making 20% on 1 million. ...have a look at Warren record way back when he has less money and unknown...30%-40% return annually isn't unusually for him.

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As an investor, if I note that it's much harder for a company to sustain high returns on a larger equity base then this is simply an indicator for what not to invest in. Bottom line for me is, what forward returns can I expect from an investment today. But you are only reinforcing my previous point, BRKA has been a lousy investment for the last 13 years and likely to continue to be so for years to come. Buffett's performance 30 years ago is less relevant to an investor today than the performance of his company over the last decade.

I think if we are discussing Warren buffetts ability as an investor and calling into question how valid his opinions are we need to look at the actual performance of the investments he is making inside berkshire rather than berkshires stock price.

Here is a comparison of Berkshires earnings compared to the sp500.


.........................Change in..............S&P 500............. Difference
.........................per share..............Including.............each year
........................book value ...........Dividends


1998 . . . . . . . 48.3 ................ 28.6 ................... 19.7
1999 . . . . . . . 0.5.......................21.0 .................... (20.5)
2000 . . . . . 6.5.......................(9.1) ......................15.6
2001 . . . . . . (6.2)....................(11.9).......................5.7
2002 . . . . . . 10.0.....................(22.1)......................32.1
2003 . . . . . . 21.0 ....................28.7.......................(7.7)
2004 . . . . . . 10.5 .....................10.9......................(0.4)
2005 . . . . . . 6.4 ...................... 4.9.......................1.5
2006 . . . . . . 18.4.....................15.8....................... 2.6
2007 . . . . . . 11.0..................... 5.5....................... 5.5
2008 . . . . . . (9.6)...................(37.0)......................27.4
2009 . . . . . 19.8.....................26.5 ......................(6.7)
2010 . . . . . 13.0....................15.1.......................(2.1)

Compounded Annual Gain – 1965-2010 . . berkshire 20.2% pa........... ps500 9.4% pa
Overall Gain – 1964-2010 . . . . . . Berkishire 490,409%......... sp500 6,262%

There will always be a degree of speculation in the share market. Nothing is certain. And it is difficult to apply reasoned analysis because I don't think humans, and therefore the market, is too rational.

I remember having a discussion with a friend. I said "company x just announced an expected decrease in profits, so their SP should go down". The next day I saw the SP go up, and my friend said people must've been thinking the SP was under-valued and the profits would increase back to the 'norm' in due course.

Beats me.