Thursday, 5 January 2012

Long Term Growth and Value Stock Picks

A lot of people would love to know what is inside Warren Buffett’s portfolio because he is noted for his long term stock picks and his value stocks.  Obviously, a lot of his investment strategy comes from Benjamin Graham, the father of value stock investing but how does one judge value?  Sure, you can look through a company’s annual reports and their financial statements but there has got to be something to be said for how a company is run.  For this information, you need to ask the right questions to the right people and that is to management, competitors, suppliers and customers.  Buffett learned this from another famed investor named Philip Fisher.  Whereas Graham was noted for finding value stocks from fundamental analysis, Fisher was noted for finding growth stocks and hence his title for the father of growth stock investing.  Buffett has admitted that his stock pick strategy is 85% Graham and 15% Fisher.

So perhaps the notion that Warren Buffett is only a value investor is a bit misleading.  Sure, there is nothing wrong with finding undervalued cheap stocks but Buffett usually doesn’t sell once his holdings have rebounded to fair value.  In fact, Buffett has stated numerous times that his favourite holding period is forever This is because his stock picks have growth potential as well.  To put it in Buffett’s terms, he wouldn’t care if the stock market closed for the next five years because he’s not concerned about the macroeconomics.  He’s concerned with the company itself in that if it is a good business, the stock will eventually follow.  That being said, “time is the friend of a wonderful company and the enemy of the mediocre”.

For beginning investors (and perhaps “sophisticated investors” as well) time and patience is perhaps the downfall of most.   It is great that technology has allowed investors to take control of their finances and invest for themselves with stock trading programs and stock filters.  However, while these can be very helpful tools and help drastically cut down research time, one has to ultimately apply the teachings of value and growth investing and add a human element.  If the stock market could be distilled into a perfect mathematical formula or if the market was truly efficient, then people like Warren Buffett would not be able to make so many winning stock picks in his career.  That being said, it only takes a few top stock picks to make one rich and investors don’t need to make so many trades with buy and sell commissions that eat away at the returns.

So if you want to be rich like Warren Buffett, you now know the formula to his success: invest in value stocks with long term growth potential.

1 comment:

Bud Labitan said...

MOATS : The Competitive Advantages of Buffett and Munger Businesses discusses the "competitive advantages" of 70 selected businesses purchased by Warren Buffett and Charlie Munger for Berkshire Hathaway Incorporated. This is a very useful resource for investors, managers, students of business around the world. It also looks at the sustainability of these competitive advantages in each of the 70 chapters.

The MOATS book introduction audio mp3 file:

audio file of Wells Fargo, WFC chapter from MOATS book:

audio file of the Johnson and Johnson chapter from MOATS:

audio file of the Costco chapter in MOATS

audio file of the American Express chapter:

The IBM Chapter from MOATS. Why did Buffett buy into a technology services
company after so many years?

Here is a 1 min : 32 sec audio file of Warren Buffett talking about an
economic castle and its moat