More Quick Thoughts
I asked the following question on a discussion forum and received some great replies.
“I’m hoping someone can help with the following. I read that Buffett recently said any of his potential successors who tried to time the market during the GFC was automatically out of the running for the top job.
At the same time during the height of the GFC and panic Buffett was op-eding about what a great time it was to buy. Buffett often holds substantial amounts of cash and deploys it at specific times when the market is cheap, as he just did so during the GFC. To me it appears like he times his purchases. While his timing may be value or other wise based, to me it appears to broadly be market timing.
Clearly I’m missing the distinction between market timing and holding cash to deploy when assets are cheap. I look forward to becoming wiser.”
Here’s my summary of the replies, not to be confused with my opinion, but I appreciate their validity.
- Don’t waste time predicting where the market will go in the short term. (That is hard to do as that is what all the noise is about. It’s hard and I don’t even tune into news.)
- Buy quality assets when they are available at good prices. (I find that psychologically easy to do, though discerning durable quality in small caps in difficult.)
- Focus on the asset being purchased at its value and price not the macro environment.
To put it in recent perspective. Those timing the market held off buying in late 2008 early 2009. Those pricing individual assets were loading up.
So while recent history makes it appear Buffett is timing the market that is coincidental in that one of the times great assets are available at good prices is during heightened systemic risk. At other times, like Amex Salad Oil, he buys during specific risk and at other times he buys when offered at good prices.
A friend texted me the other day saying they’d be late as work was all turning to shit. I replied that shit can not turn to shit, it simply is, but on a positive note shit can turn into a great fertiliser. She laughed, my work was done.
I was watching Master Chef with my kids the other night, when my six year old daughter said to me. “Why are they all so negative? If they say they can’t do it, then they won’t be able to. They should think and say they can do it and then they will do it.” My son chipped in with many examples of the contestants negativity and what they should have said. That could be innate positivity within them, but I’m going to claim it as my influence.
I want to instill a few things in my kids and near the top of that list is visualise your success. Two more near the top of the list are success is internal not external and treat others as you want to be treated. While a lot of lip service is often giving to those three principles, I find most people do not follow them. I know I sometimes fail to.
While I’m foisting my views on you, I’ll share one more I’m pushing on my kids, experiences matter more than possessions. Sadly they seem to be learning that from a different perspective. They have so many things that none of them matter!
Have you read Jeremy Grantham’s latest quarterly missive, Playing With Fire (A Possible Race to the Old Highs)? Brilliant stuff.
The main reason I’m linking Grantham in this post is to provide balance to the world Buffettites live in.
The main struggle I’ve had my entire investment life is with the preposterous belief that all information is embedded so quickly and efficiently into stock prices that asset class bubbles cannot possibly occur. But to be honest, I’ve also been pretty irritated by Graham-and-Doddites because they have managed to deduce from a great book of 75 years ago, Security Analysis, that somehow bubbles and busts can be ignored. You don’t have to deal with that kind of thing, they argue, you just keep your nose to the grindstone of stock picking. Jeremy Grantham Letters to the Investment Committee XVI*
Related posts:
Hi Dean, thanks for the link to Granthams latest newsletter, I checked on the site a few weeks ago but the newsletter wasn’t out yet. It’s the best thing I’ve read this year. I like his analysis of Buffet and the Fama and French research (the F&F research conclusions never made any sense to me either).
Grantham’s idea that quality stocks give a sustained (risk adjusted) edge is interesting, although there maybe situations of overpricing that would render this untrue.
I think Buffett is not as straightforward as is made out. If you followed what are thought to be Buffett principles I don’t think you would acheive anywhere near the outperformance. For instance he is thought to eschew market timing. Yet in one of his biographies (Snowball) he laments the fact that he didn’t participate more in the LTCM bailout (he was on a trip to somewhere remote with Bill Gates and his wife and the mobile reception cut out) when things became obviously mispriced due to fear. Market timing is essentially betting on mean reversion. He has done this with selling long term derivatives on the S&P and indexes.
At other stages he has not sold when it was obvious there was a bubble (late 90’s Coca Cola on PE in the 60’s). He has still made a good return on Coca Cola but it could have been so much more! Discerning what he does versus what he says he does versus what people think he has said or done is difficult. He often speaks in quotable quotes and the analysis is not as clear as Grantham. Buffett also has some serious eccentricities- are these part of his investing style or do these make his investing better ? Perhaps they make his investing style not replicable. Although his newsletters are informative, I get the impression he doesn’t say everything he thinks in there. That is probably the nature of managing a large corporation and maybe he doesn’t want to be replicable.
At different times he has said I don’t market time, but he bets on mean reversion. He says I don’t sell great stocks even if they are massively overpriced (eg Coke). He says I don’t invest in technology so missed out on Microsoft even though he was good friends with Bill Gates. The man is a contradiction (which is human). You have to wonder why not market time, why not sell massively overpriced great businesses (taking into account CGT considerations), why not buy tech stocks if you understand them and they are cheap, why not participate in bubbles whilst leaning against them ? Buffett is undoubtedly a great investor and must be studied but the man is human and not everything he says is gospel.
My own interpretation of his investments is that he was early to see that Coke was/ is a good company: it produces an addictive drink (with 1/3 equivalent cup of caffeine in each can) and has a good franchise. He was early to see that Insurance float is a free lunch. He has a good manager (Ajit) to price unique situations. He manages the insurance side of the business well.
On mean reverting investments, this is not as easy as it sounds. The highest probability investments happen when you bet against the bubble at near the peak (hard to do as it can keep going) or when there is too much fear and valuations are silly.
In terms of my own style I still think it is lower risk to bet on mean reversion in sectors, indexes of countries or asset classes. Recently I’ve tried to learn more about individual stocks because there is probably something I’m missing there. I’ve devoted 15% of my prtfolio to individual stock picks. I still predominately invest in indexes. Currently I’m 85% Australian equities, 15% individual stocks (10% Telstra, 4% WOW and 1% speculative). I think the resources boom has further to run but no longer have an overweight position in resources. Things could have further to run with that but I’m happy to just have a market weighting in resources at the current time.
I found the Grantham analsysis very interesting and more sophistocated than anything I could manage. It’s a shame the minimum investment amount for individuals is 500k otherwise I would plonk some in his fund.
Actually, thinking about it more, there appear to me 3 ways you can lean into a bubble, or a combination of all 3:
1. Participate on the way up, get out before the peak
2. Short before the peak and participate on the way down
3. Wait for valuations to go to the other extreme and invest for a rebound.
3. is the lowest probability in my mind as it may take a long time to reached undervalued. If you are going to do this you may as well invest in bubbles that have burst and gone nowhere for a while ie. significantly undervalued sectors/countries. No point in catching a falling knife, looking for yesterdays bubble, as it’s gone. 1 in my opinion is the highest probability and 2 is the highest reward but highest risk.
In terms of current bubbles, there are 3 that I can see as potentials:
1. Commodities: I’ve made more on this than anything else this year. It seems bubbly, but it could go a lot higher. Where would I sell out completely? Roughly Allords above 10000 before the end of 2014.
2. Housing in Australia: this has to be a bubble. Where would I sell out? When the commodity cycle looks to be peaking/ unemployment troughing or a 50% rise from here before 2014. Transaction costs (stamp duty, real estate agent etc) make it important that it has be quite overpriced to make it worthwhile to sell an investment property, even if things revert back to the long term mean over a 5 year period.
3. AUD: Also commodity bubble dependent. I’d factor it having the potential to exceed 1.2-1.4 in considering attempting 2. on this. It maybe a lower risk short than short commodities (because the upside maybe more limited). I haven’t thought this through enough, at the moment my inclination is to get a 10% internation exposure in my portfoilio above AUD/USD=1.
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