Sunday, 17 December 2017

Waiting for a Fat Pitch

Waiting for a Fat Pitch 

I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! US Steel at 39! and nobody calls a strike on you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.
— Warren Buffett, quoted in FORBES magazine

 A policy of portfolio diversification is the logical outcome of a belief in efficient markets. As Keynes noted, it is “false to believe that one form of investment involves taking a view and that another does not. Every investment means committing oneself to one particular side of the market. ”A strategy of extreme diversification is, at its core, a concession by the investor that stock - picking is futile for that particular individual — that, indeed, one stock is as good as another. It is a candid admission that the market knows more than that person.

Keynes rejected the notion that markets always priced securities correctly based on publicly available information and that, therefore, it was pointless to search for potential stunners. His view was much more pragmatic, and was grounded in his experience as an investor and financial theorist: Keynes believed that financial exchanges — although perhaps usually efficient — were not always efficient. On occasions, the stock market generates prices that veer radically from underlying value — Mr. Market is perhaps in the throes of a particularly acute bipolar episode — and it is at these times that the intelligent investor should buy in quantity. 

The poet Paul Valery once asked Albert Einstein if he kept a notebook to record his ideas — Einstein is said to have replied,
“ Oh, that’s not necessary — it’s so seldom I have one.
Similarly, opportunities to buy quality stocks at a material discount to fundamental value are infrequent.  As stock investor and author Philip Fisher commented:
. . .practical investors usually learn their problem is finding enough outstanding investments, rather than choosing among too many. .. Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself. 

Agreeing that “ ultra - favorites”are usually thin on the ground, Keynes noted that
“ there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence. ” 

When the market does offer a security at a substantial discount to its intrinsic worth the investor should, therefore, acquire meaningful amounts of that stock. 

Charlie Munger opts for a metaphor close to his heart when explaining Berkshire Hathaway ’ s policy of “loading up ”on mispriced bets:
Playing poker in the Army and as a young lawyer honed my business skills. What you have to learn is to fold early when the odds are against you, or if you have a big edge, back it heavily because you don’t get a big edge often

Opportunity comes, but it doesn’t come often, so seize it when it does come.

Good investment opportunities are too scarce to be parsimonious with, Buffett often reminds his acolytes — when a stunner presents itself, the value investor should not be afraid to back his or her judgment with relatively large capital outlays. 

Ref:  Keynes and the Market

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