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BradleyT
03-13-2005, 10:45 PM
http://news.yahoo.com/news?tmpl=story&u=/ap/20050313/ap_on_bi_ge/wall___main

NEW YORK - One of the most widely read dispatches in the investment world may be Warren Buffett (news - web sites)'s annual letter to the shareholders of Berkshire Hathaway. In this year's edition, the man known as the Oracle of Omaha offered two tips for small investors: Don't overtrade, and don't abandon ship just because everyone else is jumping.

Looking back over the last 35 years, Buffett noted that American business has delivered terrific results, which should have made it easy for investors to earn juicy returns. But for many, it hasn't been so simple.


"All they had to do was piggyback corporate America in a diversified, low-expense way," Buffett wrote. "An index fund that they never touched would have done the job. Instead, many investors have had experiences ranging from mediocre to disastrous."


Buffett blamed investor missteps on three factors: high costs, often because investors trade excessively or spend too much on management fees; poor decisions based on tips and fads rather than solid research; and untimely exits from investment positions, usually after periods of stagnation or decline.


"Investors should remember that excitement and expenses are their enemies," Buffett told shareholders. "And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."


It's a strategy that has worked well for Buffett's Omaha, Neb.-based conglomerate, which has posted an average annual gain of 21.9 percent since 1965 better than twice the return delivered by the Standard & Poor's 500 over the same period.


Berkshire and Buffett have had great success when it comes to "being greedy only when others are fearful." But maintaining such a strategy can be very hard, said Michael Mauboussin, chief investment strategist at Legg Mason Capital Management in Baltimore, and an adjunct professor at the Columbia Graduate School of Business.


"That's very plain, common sense advice," Mauboussin said. "But it's a very difficult thing to do."


Part of the difficulty comes from the fact that most major financial institutions and the financial media that cater to them focus on short-term performance. For small investors, having the conviction to resist being part of that group can be a huge challenge. But research has shown that portfolios with lower turnover rates perform far better in the long run. Less trading means lower costs, but also requires a strong stomach.


"It ... runs counter to the American way. In most endeavors, the more active you are, the harder you work at it, the better you do. Activity is equated to success," Mauboussin said. "But in investing, it's really not. Most of the great investors make very few decisions. It's kind of counter to the way most people think and operate."


Using a value-focused philosophy, Buffett has taken a long-term approach to building Berkshire's broadly diversified portfolio of businesses, which includes MidAmerican Energy Holdings, auto insurer GEICO, reinsurer General Re, aircraft fractional ownership subsidiary NetJets, manufactured homebuilder Clayton Homes, carpet manufacturer Shaw Industries, apparel maker Fruit of the Loom, Nebraska Furniture Mart and Dairy Queen.


Berkshire's nearly $38 billion stock portfolio includes a 12.1 percent ownership stake in American Express Co., and significant positions in The Coca-Cola Co., Gillette Co. and H&R Block Inc. On a weighted basis, the company had held its positions in these stocks for about 12 1/2 years. Berkshire also owns 18.1 percent of The Washington Post Co., an $11 million investment made in 1974 that is now worth an estimated $1.7 billion.


The company's underlying value is reflected in the price of its shares, which can be had in two flavors; A-class shares, which closed Friday at $90,625, down $75.00 as the market swooned over economic data, or B-class shares 1/30th of the size which slipped $6.00 to $3,001. Either will serve as a ticket to Berkshire's widely attended annual meeting in Omaha next month, and get you an 8 percent discount on GEICO car insurance, one of the many businesses Buffett plugs in his letter.


Berkshire's long-term performance, contrasted against last year's return, provides a lesson in itself. Despite his many successes, Buffett apologized in his 40th letter to shareholders for Berkshire's "lackluster" 10.5 percent book-value gain, which fell short of the S&P's 10.9 percent return for 2004.


One of the more interesting things about the letter was what it was missing, said Dreyfus Neenan, senior analyst at Morningstar Inc. Berkshire ended the year with $43 billion in cash equivalents, "not a happy position," Buffett wrote. The problem was that Buffett and his team, who love buying great companies at bargain prices, found a dearth of acquisition opportunities, and very few attractive securities to buy.


"Warren Buffett, being Warren Buffett, you know that's burning him up. He wants to make money," Neenan said. "So you have to ask yourself, if one of the best investors in history can't find any attractive investments, what does that say for the rest of us?"


Still, Neenan and others noted, most of us don't have the problem of putting $43 billion to work. While Berkshire's lack of acquisitiveness in 2004 could be seen as an indication that the private equity markets are a bit frothy, a number of stocks still hold appeal for value-minded investors with less money to spend. In Morningstar's database of 1,500 stocks, 40 have won a five-star rating, based on their attractive valuations. The question is, if you invest in these, will you be able to apply a buy-and-hold strategy with a Buffett-like discipline?





Doing so doesn't necessarily mean never revisiting your position. Buffett is critical of himself for not selling more stocks in 1999 and 2000, when he was questioning market valuations. There's a lesson in that too, Neenan said.

"If you have the will power to just sit tight, you can do big things," he said. "But be wise enough to look back at your past decisions and evaluate how they perform. A lot of people tend to bury their losses and forget about them. But even this guy is always re-evaluating, he's always looking back and trying to learn."

tek
03-14-2005, 08:40 PM
Remember, he was a student of the buy and hold masters. Buying and holding is easy to do when you start out with 2 MILLION in 1965!

For real traders, our time horizons can be anywhere from 2 months to 2 hours. Obviously, the shorter your time frame, the more trades you can rack up. It all comes down to identifying proper entry and exit points for your particular time frame.

Buffet saying not to trade to much is like some Grampa telling his grandson not to do too much extreme skateboarding.

Allinlife
03-15-2005, 01:15 AM
[ QUOTE ]
Remember, he was a student of the buy and hold masters. Buying and holding is easy to do when you start out with 2 MILLION in 1965!

For real traders, our time horizons can be anywhere from 2 months to 2 hours. Obviously, the shorter your time frame, the more trades you can rack up. It all comes down to identifying proper entry and exit points for your particular time frame.

Buffet saying not to trade to much is like some Grampa telling his grandson not to do too much extreme skateboarding.

[/ QUOTE ]
I'd stop skateboarding if Tony Hawk told me to... /images/graemlins/confused.gif

DesertCat
03-16-2005, 09:24 PM
[ QUOTE ]
Remember, he was a student of the buy and hold masters. Buying and holding is easy to do when you start out with 2 MILLION in 1965!

For real traders, our time horizons can be anywhere from 2 months to 2 hours. Obviously, the shorter your time frame, the more trades you can rack up. It all comes down to identifying proper entry and exit points for your particular time frame.

Buffet saying not to trade to much is like some Grampa telling his grandson not to do too much extreme skateboarding.

[/ QUOTE ]

You should learn something about Buffett before you start acting like an expert. He essentially started out in the early fifties. And his starting capital was on the order of $10k, saved from numerous childhood jobs.

And his long term track record is the best, by far. Trading is a broad term to categorize, but most traders aren't successful. Daytraders all go broke given enough time. Traders who use charts or chase momentum only beat the market for short periods.

The only traders who consistantly make money are basically performing some type of arbitrage trade, which is similar to value investing over a shorter periods. In fact, buffett has been doing successfully arbitrage for about 50 years. But it's rarely something a part-time investor can do successfully, which is who he is advising here.

tek
03-17-2005, 06:15 AM
I read somewhere that he had investors in the mid 1960's. My point is that he didn't start on a shoestring to make 30B.

DesertCat
03-17-2005, 07:41 PM
[ QUOTE ]
I read somewhere that he had investors in the mid 1960's. My point is that he didn't start on a shoestring to make 30B.

[/ QUOTE ]

Well read my post again. He started with around $10k, which is basically a shoe-string. You can actually argue he started with less, because much of his childhood earnings were from investing (Stocks, land, and believe it or not, Pinball Machines). By the time he was 40 years old he was worth millions of dollars and retired briefly.

And now he's worth $45B, not $30B...