Buffett-Style Buy And Hold

Investing Strategies
Buffett-Style Buy And Hold



Drew Tignanelli, 01.22.09, 03:52 PM EST


Buy good values, hold them until they're fully priced and move along, unless the business keeps improving.


Warren Buffett is not a buy-and-hold investor, so why are you?


The concept of buy and hold is nothing more than a sales pitch that was created by the financial services industry in the last secular bull market preparing for the next secular bear market (what we are currently experiencing). The industry is the only one making money on the buy-and-hold myth. They even use Buffett as the poster boy for this philosophy, but when you read his biography Snowball and study his investment moves, he certainly is not a buy-and-hold investor.
Yes, Buffett started buying Geico in 1950 and owns the whole company today. Yes, he has owned The Washington Post (nyse: WPO - news - people ) for 30-plus years. He also owned Freddie Mac (nyse: FRE - news - people ) and sold it after 15 years. He has owned Petro China (nyse: PTR - news - people ) and sold it after three years. He even owned Hospital Corp. of America and sold it in less than a year.
The truth is that Warren is a risk manager and buys what he believes is a good value. Value can arise from income, assets, economic expectations, company expectations or intrinsic values. He wants to own a good company run by good people and buy it for a good price. He then constantly monitors his thesis for owning the property and will sell when he admits his assessment was wrong, the situation has changed or the value has been extravagantly realized. Sometimes that happens in a few days, a few weeks, a few years or a few decades, and he has not been investing long enough to say if it would be a few centuries.
Risk, in fact, is wrongly assessed as the volatility of an asset. The emerging markets are assumed risky, because the past trading range can be up or down double digits. When China declines as it did in 2008 by 65%, I would suggest that there is less risk today in China's market than in the U.S. market, which went down only 38% in 2008. American investors have a false belief that our markets are more developed and therefore less risky, but I would say due to our economic and demographic landscape the general U.S. market is riskier, especially considering the significant discount difference that took place in 2008. As a shopper I would not be attracted to a DVD player marked down 30% as compared to the latest iPhone 3G marked down 60%. This is in essence what is happening in the mature U.S. vs. the upcoming China.


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Risk is about the price you pay and what you get for that price. If I know what I own for the price I paid, then the daily price other investors are willing to pay is irrelevant. The flip side of buying a solid asset at a good price is selling that solid asset at an irrational price. It may also mean selling an asset when the economic conditions have shifted, reducing future value.
Risk managers focus on not losing money and not on making money (although you have to wonder what at all they were doing at the big Wall Street firms these past few years). The most ridiculous concept young people have learned is, "I am young so it is OK if my account goes down 50%, because I have time for it to come back." A young Buffett would consider that foolish. Buy a great asset at a great price so that it is less likely to go down, but if it does you know for sure it will come back. If you buy a mediocre asset at a bad price, it may never come back, or it may take many years for it to recover. This defines the average American investor trying diligently to be a long-term buy-and-hold investor, but after 10 years of losing money their patience is running thin. American markets are currently mediocre assets at a fair price but certainly not a cheap price.


Comment On This Story




It is true you cannot time the market, but you can tell in general when the risk reward ratio is not in your favor. You can also tell where the price decline of a good long-term asset is reflecting value and lower risk due to the price decline. Great examples of these value opportunities today are the Asian tigers and commodity companies. If you buy into these ideas, then make sure you understand why so that you can be ready to sell in the future when new investors and economic shifts have consumed the opportunity.




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The sell decision is the key of a great investor, more so than the buy decision. Buffett knew it was time to unload Freddie Mac because things changed. He also knew that Geico was still a great company after 50 years.
Many professional and amateur investors want a simple investment concept that takes minimal effort, but great investing takes work and requires an understanding of some concepts that are worth learning.
It's important to have a good understanding of economics and how governmental policy, currency movements, tax policy, interest rates and monetary policy impact the risk of a country's market for stocks and bonds. You also need to understand the drivers of investment values and where market prices stand in relation.
Also keep in mind that market movements are both rational and irrational. The market you see daily is the inefficient market that is irrational, emotional and psychologically driven by investors overcome with greed and fear. The invisible, efficient market is driven by smart investors who seek value and buy assets priced right for a solid risk-reward opportunity. This efficiency can take days, weeks, months or years to be realized.
You need to be a risk manager like Buffett.


Drew Tignanelli is president of The Financial Consulate, a financial advisory firm in Hunt Valley, Md.



http://www.forbes.com/2009/01/22/buffett-value-investing-fan-is-in_dt_0122investingstrategies_fan.html?partner=alerts



My comment: Buy, hold and selective selling