Showing posts with label Buffett's shrinking portfolio of the 1980s. Show all posts
Showing posts with label Buffett's shrinking portfolio of the 1980s. Show all posts

Friday 2 July 2010

Do not scoff at an Overall Rate of Return of 8% p.a. of your TOTAL portfolio

Asset allocation is the next most important factor, after asset selection, in determining the overall rate of return of your total portfolio.


Here are some illustrations to bring home this important fact.

Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate  of    8%)

Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of 10%)

Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of 15%)

Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of  20%)
http://spreadsheets.google.com/ccc?key=0AuRRzs61sKqRdE9yeVRvSzRrMzM5djc0MHA0cERLbXc&hl=en

Asset Allocation and Overall Rate of Portfolio Return  (Equity  Growth  Rate of    -10%)


It is common enough to hear of 'investors' and 'speculators' achieving high rate of return on their equity/equities.  An equity portion may give a return of >15% or >50% p.a., but this may only translate into a small overall return to the total portfolio if the percentage of equity is a small portion of the total portfolio.

Therefore, do not scoff at the investor who is able to grow his/her total portfolio at an overall rate of return of 8% or more p.a.  It is no mean feat indeed.  Just study the spreadsheets to gauge what is required to achieve this.

On occasions, there are those who are 100% in cash.  This doesn't make sense, as the risk of being in 100% cash compared to being 80% cash: 20% equity is almost the same and moreover, the later has a greater probability of a higher return compared to the former.


Sunday 13 September 2009

*****Buffett's shrinking portfolio of the 1980s (2)

http://spreadsheets.google.com/pub?key=t7u4BYlpDKstozulNims5Hw&output=html

The above table shows, Buffett entered the 1980s energetic, ready to dive into a market he saw as woefully underappraised. As the market rose in value without pause, Buffett's conservatism got the better of him. By 1987, he was holding large stakes in just three stocks. When the decade began, Buffett had amassed large positions in 18 different companies.

Warren Buffett does not possess a magic formula for determining when the stock market is grossly overvalued or undervalued. By all accounts, his decisons to plunge into or escape from the marekt are based on several commonsense factors, namely:

1. The relationship between stock yields and bond yields.
2. The rate of climb in the market.
3. Earnings multiples.
4. The state of the economy.
5. The big picture (holistic view of companies, industries, and the entire market).

*****Buffett's Shrinking Portfolio of the 1980s (1)

http://spreadsheets.google.com/pub?key=t7u4BYlpDKstozulNims5Hw&output=html

Market Call by Buffett: Seeing the opportunities that would open up in the 1980s

By 1979, the Dow Jones Industrial Average traded no higher than it did in 1964 - 15 years without a single point gain!

Pessimism hit extreme levels. The public had gradually shifted their portfolios into bonds, real estate, and precious metals, and brokers found it difficult to peddle even stocks with 15 percent dividend yields.

Leading market strategists of the day, predicting more of the same financial morass, implored investors to buy bonds and avoid stocks. Buffett saw things differently. From his perspective, quality blue-chip stocks were being given away; some sold for less than their book values, despite the fact that econmic prospects for the United States still appeared bright.

Corporate returns on equity remained healthy, blue-chip earnings were advancing at double-digit rtes, and the speculative frenzy that had destroyed the integrity of the late-1960s markets had finally been removed from the equation.

"Stocks now sell at levels that should produce long-term returns superior to bonds," he told shareholders. "Yet pension managers, usually encouraged by corporate sponsors that must necessarily please, are pouring funds in record proportion into bonds. Meanwhile, orders for stocks are being placed with eyedropper." How right Buffett was.

As Tilson pointed out, the stock market has returned an annualised 17.2 percent since Buffett penned those words. Bonds returned 9.6%.


Market Call by Buffett: Avoiding the 1987 Crash

By the mid-1980s, Buffett's buy-and-hold philosophy had been carved in stone. He maintained large stakes in his three favorite companies - GEICO, Washington Post Co., and Capital Cities/ABC (which later merged with Walt Disney) - and pledged to hold these "inevitables", as he called them, forever. He didn't share the same convictions about the rest of the stock market.

At the Berkshire Hathaway annual meeting in 1986, Buffett lamented that he could not find suitable companies trading at low prices. Rather than dilute his portfolio with short-term stock investments, and given the fact that Buffett's stock holdings had already provided him tens of millions of dollars in gains, Buffett opted to take profits and shrink his portfolio.

"I still can't find any bargains in today's market," he told shareholders. "We don't currently own any equities to speak of." Just 5 months before the 1987 crash, he told shareholders of his inability to find any large-cap stocks offering a high rate-of-return potential: "There's nothing that we could see buying even if it went down 10 percent."

In retrospect, Buffett's comments about a 10 percent decline ultimately proved conservative. Five months after telling shareholders of his dilemma, the stock market lost 30 percent within a matter of days.

His decision to whittle away his portfolio slowly before the crash undoubtedly kept Berkshire's stock portfolio from imparting too big a negative influence on book value.