When Warren Buffett (WB) speaks the long-always investment sales world grabs what it can to serve its thesis and runs. Honestly Warren must be one of the most misrepresented guys that ever lived.
A few weeks ago, WB was interviewed saying how he was a long-term Bull on America. From this statement the buy & hold peddlers proclaimed his statement as re-affirmation that the rest of us need never time exposure to equities, no critical thinking required, just buy 'em always, and sell 'em never and you will be fine. How convenient. How easy.
This week WB is quoted as saying he thinks the US economy is already in a recession by any common sense definition, and while some are touting stocks as cheap he is waiting for them to become quite a bit cheaper. Oh yes, and he presently has about 40 billion+ in cash for when sale prices present.
History and WB's own writings will attest that he has been a master market timer throughout his career. He has a precisely defined set of valuation rules, and he sticks to his discipline. When something is priced within his value zone he will buy it, and when prospective investments are too expensive on his valuation rules he will not touch them. When he does not find anything to be a good value by his rule set he waits in cash.
“As for how long we will wait?” He has said, “We’ll wait indefinitely. We aren't going to buy anything just to buy it. We will only buy something if we think we're getting something attractive…We have no time frame. If the money piles up then it piles up…You don’t get paid for activity. You only get paid for being right.”
— Berkshire Hathaway Annual Report, 1998.
In this one statement WB pin points the important difference between skillful investors and the investment sales world: most on the sales side are paid for activity, “getting others to buy” activity to be precise. The sales force makes its money up front. They do not get paid for being right. They are paid for getting people to buy and hold.
WB is a proud American and a long term optimist. As both he loves his country and he believes (and hopes) that they will find a way to turn their economic problems around over time.
But Warren is not a fool. He knows that a turn-around will take real work and some time. From 50 years of experience and diligent study he knows that bear markets are a regular recurring feature of each economic downturn. He knows that bear markets during recessions tend to be particularly hard on invested capital. And that those who have built up their cash and have a valuation discipline can use bear markets as an opportunity to buy good assets at large discounts. He has made himself a billionaire by doing precisely this repeatedly over a life time.
And while he does hate to pay tax, WB has and does sell investments when they have reached his price target, or when their fundamentals change, or they become priced above rational valuations.
In some cases, Berkshire owns such large chunks of publicly traded companies like Coke and Gillette that selling these shares becomes practically impossible. Doing so would drive market prices down against themselves and trigger large tax liabilities which have accumulated over decades of ownership. So sometimes WB has to hold even when, as now, he sees bad markets coming.
But very few people in the world are like WB. Most have much more finite resources, much less capital, much less discipline, much less insight and skill in investment picking, and much less time to see their picks work out within their own life time. Warren already has more money than he could ever use in his lifetime. His time horizons now are incredibly long as he looks to the stewardship of his foundation and its legacy.
For the rest of us regular folks Warren has repeatedly said that the most important rule for real life investors is to “not lose money.” You can’t follow this most important rule by staying fully invested throughout a bear market. In the end, this is the most pragmatic advice we can bank on.
Follow
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