Saturday 18 April 2015

Want to invest like Warren Buffett?

It's about quality investing

Ask Buffett, who he thinks is the greatest investor in the world, and he will probably tell you his teacher: Benjamin Graham.

Having studied economics at Columbia Business School, Warren Buffett was taught by Benjamin Graham, and if that was not enough of a head start in his investment career, Buffett was fortunate enough to work with Graham, too. Both are seen as value investors – buying companies that trade less than their intrinsic values.

However, there is a school of thought that sees value as a bit of a misnomer. Clyde Rossouw, manager of the Investec Global Franchise Fund, argues that while Graham is known as the father of value investing, in truth he should probably be known as the father of quality investing, as most of the characteristics he speaks about in terms of the companies he looks for references 'quality' attributes, rather than value.

Value investing by definition involves buying bargains.

However, given the choice between buying a good-quality company rated on a higher price, or a lower-quality company attractively priced, Buffett, like Graham will opt for the former. 
That's because investors are more inclined to pay up for quality companies. In turn this offers potential for the share prices of good-quality companies to recover to (and above) their long-term average earnings multiple.


The "challenge" of too much cash

Besides gearing up for 'Investor Woodstock', what is the Sage of Omaha doing now? Sitting on a lot of cash – according to media reports Berkshire currently has around $25 billion in excess cash.

This 'challenge' of too much cash, some argue, is changing Buffett's investment approach.

Rossouw points to Buffett's investment in Burlington Northern Santa Fe Railroad operator, as an example of the investor trying to shed some of this cash. 'Yes, this investment has a strong 'moat' but it is highly capital intensive – keeping a railway maintained requires you to spend a lot of money consistently over time. It helps Buffett deal with a key problem which is the largess of excess cash generated by his insurance businesses each year.'

Buffett's cash pile could mean many things. 

  • It could be, as some believe, a problem of too much money, and not enough investment opportunities. 
  • It could be a precautionary measure to make sure his company is well positioned to cope in an increasingly uncertain environment. 
  • It could be that Buffett is positioning himself to make another big deal.


Or it could be all of the above. But then we can't know everything about the most glorified and respected investor of our time.


Read more: http://www.thisismoney.co.uk/money/diyinvesting/article-2957271/Four-things-not-know-Warren-Buffett-probably-should.html#ixzz3XeBaAw4y

1 comment:

Serenity Stocks said...

Benjamin Graham - also known as The Dean of Wall Street and The Father of Value Investing - was a scholar and financial analyst who mentored legendary investors such as Warren Buffett, William J. Ruane, Irving Kahn and Walter J. Schloss.

Warren Buffett once wrote a detailed article explaining how Graham's record of creating exceptional investors (such as Buffett himself) is unquestionable, and how Graham's principles are everlasting. The article is called "The Superinvestors of Graham-and-Doddsville".

Buffett describes Graham's book - The Intelligent Investor - as "by far the best book about investing ever written" (in its preface).

Graham's first recommended strategy - for casual investors - was to invest in Index stocks.
For more serious investors, Graham recommended three different categories of stocks - Defensive, Enterprising and NCAV - and 17 qualitative and quantitative rules for identifying them.
For advanced investors, Graham described various "special situations".

The first requires almost no analysis, and is easily accomplished today with a good S&P500 Index fund.
The last requires more than the average level of ability and experience. Such stocks are also not amenable to impartial algorithmic analysis, and require a case-specific approach.

But Defensive, Enterprising and NCAV stocks can be reliably detected by today's data-mining software, and offer a great avenue for accurate automated analysis and profitable investment.