Wednesday, 10 February 2010

Portfolio Review

5 stocks are fairly valued; 1 is undervalued and another is overvalued.  None of the stock is very overvalued.

The market has turned volatile. 

However, the market is certainly not in a bubble.

1 comment:

Rob Bennett said...

Though we often hear only his "buy and hold forever" mantra, Warren Buffet has in fact been cleverly employing the equivalent of THE RATIONAL INVESTING MODEL, incorporating long-term market timing based on valuation of the market in his allocation of his money to stocks.

That's precisely correct (in my view!), BullBear.

Buffett's Value Investing is the best investing approach. There's only one problem with it. It requires more work than the typical middle-class investor is willing to put into the investing project.

Bogle's Buy-and-Hold has the benefit of simplicity. So it almost offers a means for middle-class investors not willing to do the research that must be done to make the Buffett approach work to participate in the benefits of stock investing. One of my favorite book titles is "How I Almost Made a Million." Adding the word "almost" to a declarative sentence changes the message being conveyed.

Unfortunately, Bogle made a big mistake. He neglected to incorporate a valuations component into the model. As a result, his model in practice is the opposite of Buffett's model. Buffett has people investing in great value propositions and holding them until they pay off. Bogle has people investing in horrible value propositions and refusing to acknowledge the error no matter how much wealth they destroy by doing so.

I recommend a melding of the Buffett and Bogle models. We need the simplicity of Bogle's approach. But it must work in the real world or middle-class investors will reject it after it destroys them. The way to make the Bogle approach workable for regular people is to incorporate a valuations element to it. That's Valuation-Informed Indexing.

Investing can be simple as pie for those who invest in indexes. And indexes can provide solid long-term returns. But none of the magic happens unless you are willing to look at the price of the stocks you are buying before putting money on the table. Holding makes sense when the thing you are holding represents a strong long-term value proposition. When the thing you bought offers a poor long-term value proposition, holding in the face of all the evidence that you have made a terrible mistake is the worst strategy of all.

I recommend Value Investing for the sophisticated investor and Valuation-Informed Indexing for the typical middle-class investor. My take is that Buffett and Bogle go together like chocolate and peanut butter!