Buffett – Does What I Say
This article from the Telegraph highlights how Buffett does what I say, without even listening to me 
Buffett says be careful with commodities, hedge the USD via buying companies in strong economies and beware private equity partners in sheep’s clothing. Last time I checked private equity partners all wore wool suits, so avoid the lot of them.
Coming from a growth investing background I was originally surprised to find that I had a lot in common with value investors like Buffett. My surprise turned to interest and on to an exploration of value investing. Buffett came to a similar, albeit more advanced, point from the opposite tractory. He started from a value investing framework and layered on growth investing concepts.
I have been stunned to see people write-off Buffett and worse yet comment that he has never said anything directly useful. I kid you not. I remember one guy in particular who clearly needed a detailed instruction manual on how to wipe his arse, complete with diagrams showing angles, velocity and pressure at each point. With that in mind…umm actually don’t keep that image in mind…with detailed instructions in mind I’m going to translate what Warren said into actionable items.
Warren Buffett has hit out at private equity firms, saying that whenever he gets a call from one he puts the phone down.
Characterising them as “deal flippers” that do nothing to create value, Mr Buffett told the annual meeting of his investment company, Berkshire Hathaway, that he would never buy a company from private equity investors.
“They invariably auction the business and are looking for strategic buyers,” he said. “A strategic buyer is just someone who pays too much.”
“We have so many deal flippers in the game they’re going to get in each other’s way,” Mr Buffett’s chief lieutenant Charlie Munger added.
“How will private equity firms continue to make money by just flipping and flipping and flipping and flipping?”
“They’ll make it on fees, fees, fees,” quipped Mr Buffett, adding that when he gets an offer from a private equity group, he puts the phone down “even faster than Charlie“.
Does the Myer float spring to mind? The chance of it being a great deal are ludicrously low. The only people sure to profit from the deal are the private equity owners and the brokers. That said $3.90 does look attractive, but the chance of the shares being priced under $4.00 is close to zero. While Myer may be an average investment and that may be all you seek, for those looking for outstanding investments you won’t get one via a private equity offering. I’ll be taking a pass.
I’ve read several valuations on Myer and all come to the same conclusion that the range is fair to high. The commentators often use David Jones as a relative comparison. What they all neglect to say is that prior to an IPO or re-listing companies juice their numbers. They make them look as good as possible by curtailing as much spending as possible and ramping sales. There are many ways to do this and TPG and Blum Capital not doubt no every trick in the book to make Myer’s earnings look as good as possible. Most of the talk is also about forward earnings! Buying Myer’s now means you’re paying for peak profitability at higher than discount prices, that leaves no margin of error. The final nail in the coffin for me is the big picture. Retail is moving online and the likes of Myer are simply the newspapers of the future, though worse as they’re more likely to get slaughtered in the move online. Don’t be a strategic buyer of Myer. Stephen Bartholomeusz offers an alternative perspective in this excellent article, Hawking Myer’s Wares.
Mr Buffett also had harsh words for speculators who, like Lord Browne of BP, he blamed for driving up the price of everything from housing to oil and metals.
The commodities bubble in particular, he said, could end badly for investors. “At the start of the party, the punch is flowing, everything’s going well, but you know at midnight it’s all going to turn into pumpkins and mice,” he said.
Be careful out there and don’t get sucked into it’s different this time. If you’re buying into this rally then be sure to sell quickly when demand for commodities drops. There are a few ways to make sure you don’t get burnt. Kept abreast of the fundamentals. Use trailing stops. Use technical indicators like a cross of a shorter term moving average below a longer term average. I don’t invest in commodities so can’t provide advice on the fundamentals to keep an eye on. If you’re riding a bubble then trailing stops are good, but give them plenty of room as volatility increases during bubbles. Make sure you never let a profitable position become unprofitable, you should have a final stop at your cost price.
I primarily use a combination of fundamentals and technicals. I find fundamentals get me into and out of trends earlier, while technicals are my safe guard against being wrong, they’re my final wake up call. So in commodities I’d be following the news flow, prices and volumes for commodities and whatever other fundamentals are important, but at each major negative technical point I’d double check the story and make a decision. The 50 day moving average crossing below the 200 moving average would be final get out wake up call. The most important thing to remember is capital is scarce while opportunities are plentiful. It doesn’t matter if you get out too early and leave money on the table, that is what good investors do. Staying investing when the bubble has popped and the trend is against you is the surest way to turn into a pumpkin.
As Seth Klarman said, “The value of in-depth fundamental analysis is subject to diminishing returns.” And “Most investors strive fruitlessly for certainty and precision”. No matter how good your fundamental analysis is you will never know everything, the danger is you’ll convince yourself that you do better and that you’re right and the market is wrong. There are a handful of people in the world who may justified in that belief, but me you are not in that select group. So I use technicals to supplement my ball park fundamentals.
Instead, Mr Buffett said he was looking for more foreign companies to buy following his acquisition late last week of an 80pc stake in Israeli machine tools company Iscar Metalworking for $4bn.
He said buying companies with earnings in non-dollar currencies was a more sensible way to hedge against the fall in the dollar he predicts than taking direct positions in the foreign exchange markets.
I’ve been suggesting exactly that since the USD soared on the temporary updraft caused by the flight to safety during the GFC. US investors should have already increased their exposure to international equities and in particular Australia and other strong economies. For those wanting to go the currency root, there are four main avenues; direct currency, futures, options and ETFs. I looked at all four about a year ago and in hindsight wish I’d written better notes on why I chose direct currency. So all I can say is I chose direct currency after days of research and that it is really easy to trade via a Fx broker or the likes of Interactive Brokers.
Look for Australian, Canadian or companies in other strong countries. Australia is a great play on the growth of Asia, energy and commodities.
via Buffett: ‘I don’t buy from deal flippers’ – Telegraph.
Strong Australian Dividend Stocks
The four major Australian banks, NAB, CBA, ANZ and WBC are all excellent dividend payers. However, articles have started appearing in newspapers and the mass media about the strength of the banks and their value. I should have known better to sell part of our holdings prior to seeing these articles appear, but their appearance confirms it’s now time to look in other places for value. I will continue to hold our positions in ANZ, WBC and MQG, but would not bother adding at these levels. My point, in case it is not completely obvious, is good investment are not handed to you by journalists. By the time an investment is being touted by the mass media the easiest of gains have been made and you simply can’t outperform markets by investing alongside everyone else.
Telsta Corp, TLS, is my pick of the large Australian dividend payers. It’s not a great company, it faces many hurdles and its path is uncertain, but the price is right. Take a dash of Buffett, ‘you pay a very high price in the stock market for a cheery consensus’ and glug of Pabrai ‘high on uncertainty low on risk’ and you have the core of my investment thesis here. You get paid an 8.6% dividend while waiting for the uncertainty to clear and at current prices have a low risk of permanent loss of capital. Telecommunications is and will continue to be a growth sector for years to come, while competition is fierce Telstra’s brand is an excellent moat. Buying at current prices gives investors the opportunity of a good capital gain and US investors get the added possibility of currency gains on the back of the falling USD. One analyst has a $4.55 12 month price target on Telstra, while I think that is a stretch, 10% annual capital gains to add to the 8.6% dividend is certainly very achievable.
Australian Growth Stocks
I still like M2 Telecommunications at current prices, but it trades thinly.
I’m currently writing posts on both Australian dividend paying and growth companies, so will leave further discussion for those posts.
Here’s a list of Australian Companies trading in the US.
Disclosure: I have long positions in both M2 Telecommunications and Telstra. I have a USD short position. I will not be increasing my USD short now, my next move is most likely to be removing it via a trailing stop, especially if parity is reached.
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