MYTHS ABOUT WARREN BUFFETT

MYTHS ABOUT WARREN BUFFETT

Many try to put words into Warren Buffett's mouth, or twist and interpret what he means. Therefore it is best if you go online to his website at www.berkshirehathaway.com and read for yourself his own words. You will probably find his writing to be impactful, easy to understand, commensensical, down home, humorous, and very entertaining. Read his owner's manual, which is probably the best way to dispel commonly held myths about him.


Myth #1: The buy-and-hold strategy that Warren Buffett practices doesn't work.
Some people even say that Warren Buffett trades stocks short term and therefore doesn't follow his own advice. But if you skip the research, follow the crowd, purchase without knowing the intrinsic value of what you're buying, pay too much, invest in a rapidly changing industry, or buy a wonderful business with lousy management, then it's true: no amount of time will cure your investment mistakes.

Besides, "buy-and-hold" are the wrong three words to describe the incredible wealth creation of Warren Buffett and his partners. Instead, consider any of these three-word phrases-- any one of which better describes Buffett's investment style:

- cheap and keep
- margin of safety
- circle of competence
- Graham and Dodd
- timeless value investing
- calculate intrinsic value
- purchase superior management
- know your stocks
- concentrate your ownership
- partner for life
- value always matters
- twenty investment moves
- read, then own
- investor, not speculator
- wise, intelligent investor
- owner, not trader

Myth #2: Warren has just been lucky.

Creating more than US$100 billion in value from scratch is hardly lucky. Moreover, besting the market by more than two times its average, over five decades of professional management, is nothing short of remarkable. Berkshire's chairman disregards all games of chance and is a great admirer of skill and discipline in all areas.


Myth #3: Warren Buffett doesn't do as well in bear markets or down markets.

In fact, his best performance comes when the market is declining over time instead of rising. Actually, all of his best-performing years over the past five decades have come during market declines, and conversely, he has not been able to add value to his partners' investments when the market has reached its highest level. All value investors do better in declining markets and find more opportunities.


Myth #4: The average investor can't do what Warren has done and continues to do.

Although it's true that most people can't buy whole companies and are unable to create a cash flow machine that now generates more than $150 million per week, the real advantage of the small individual who knows how to value companies is to buy a meaningful amount of stock without causing any disruption to the capital markets. The average stock market participant has the whole universe of stocks and investment opportunities. Buffett is limited more and more each year to attractively priced and competently managed companies that are now earning in excess of $50 million per year. You-- the hoi polloi-- can add rabbits to your portfolio, whereas Warren can add only elephants to his.


Myth #5: Change means risk.

Because investors believe this myth, many attempt to get in and out of the market in order to reduce their risk. But it's a myth to associate change with risk. Invest in what is most stable. For example, Coca-Cola is the same business today as it was a hundred years ago, just larger. Traders fail to realize that rapid movements in and out of a stock or mutual fund are actually increasing risk. It would have ben very risk for Buffett to buy Coca-Cola for a short time period, because it very likely would have declined further. Owning old-economy stocks, purchased at a discount to their intrinsic value, for the long term is not risky.


Myth #6: The company you bought today may not be the same tomorrow.

Notice that Warren has built wealth in companies that are stable and enduring-- bricks, footwear, paint, insurance, candy, newspapers, jewelry, furniture, underwear, children's apparel, beverages, and (everyone's favorite) Dairy Queen. He is invested in a wide, diverse group of businesses-- at last count, more than one hundred, many managed by families for the benefit of families.


Myth #7: Because people are no longer loyal in business and in general, we shouldn't invest for a lifetime, as Warren does.

One of the secrets and the magic of Buffett is his ability to choose loyal managers. With an underlying philosophy of never laying off employees or selling a business that he has bought in its entirety brings him more business and the right kind of investments. Most CEOs and employees who care about their business and their jobs welcome the opportunity to become part of the Berkshire family. They know their loyalty will be returned.


To be continued...

POSTED :01 Feb 2006