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French Teacher Says: "For anyone willing to do a bit of reading, Buffett's methodology isn't that complicated, and can indeed be duplicated"

 

O.k., if it isn't so difficult to duplicate, it shouldn't be difficult for you to show us many, many other managers or firms who are, have been and can duplicate his strategy....show us the proof that we can all be Warren Buffetts.

 

ScottyD

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French Teacher Says: "For anyone willing to do a bit of reading, Buffett's methodology isn't that complicated, and can indeed be duplicated"

 

O.k., if it isn't so difficult to duplicate, it shouldn't be difficult for you to show us many, many other managers or firms who are, have been and can duplicate his strategy....show us the proof that we can all be Warren Buffetts.

 

ScottyD

 

 

The proof is in the original post I wrote: Buffett himself has taken great pains to make certain that his methodology is no secret. As Mark correctly pointed out, even his own methodology isn't as ground-breaking as many people believe it to be, based on Graham and Dodd's value investing. It's simply not that complicated here in the information age to find companies with consistently good results, with a "wide moat" surrounding their businesses, whose stocks are currently not priced the way they "should" be.

 

If, for any reason, people find Buffett's writing to be inaccessible to them, there are any number of books, speaking to any level of expertise, that detail Buffett's approach to stock selection.

 

Of course, while Buffett's methodology can be duplicated, his results are a bit harder to come by. That should go without saying; the man is an all-star among all-stars. Nevertheless, his methodology isn't so esoteric that it can't be used to produce returns better than the benchmarks. That may not be worthy of Berkshire Hathaway stockholders, but it should be fine for small investors like us, no?

 

 

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Nevertheless, his methodology isn't so esoteric that it can't be used to produce returns better than the benchmarks.

 

 

FT,

 

If this were true, why is it that professional managers (with far more time, research, and expertise) have such a tough time doing so?

 

 

 

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Hi,

FT, your post on Buffett amused me. I guess you think we are the great unwashed that need to be educated. I can assure you some of us here know about Buffett. Have you read the biography on Buffett by Roger Lowenstein? I believe it is out of print now, but it is worth reading.

 

What I find interesting about your discussion about Buffett is why are you investing your money with ING? If you really believe that the Buffett way is the path to riches, I don't understand why you wasting your resources on ING? Another way for you to get rich from Buffett is to buy shares in BRKB. Hey, they are only about $3600 a share http://finance.yahoo.com/q?s=brkb, or BRKA for about $108000 a share http://finance.yahoo.com/q?s=brka. Go for it! Best Wishes.

 

Joe

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It's simply not that complicated here in the information age to find companies with consistently good results, with a "wide moat" surrounding their businesses, whose stocks are currently not priced the way they "should" be.

 

How does one determine what the "fair value" of a company stock is? I tend to think that especially in this information age, the market instantaneously determines the fair value of each and every stock(There are a lot of investor brighter and with more resources than me who invest their monies to determine the "fair value" of stocks), so I personally invest in index funds where the cost is low and diversification is great. As I mentioned before these index funds have lower risk then a select group of stocks(in one segment of the market), and do not have individual stock risk. Additonally the paper work is less with index funds, versus a large portfolio of individual stocks.

 

Is it possible that Buffet who buys controling ownership of companies has information available to him that is not available to the general public? Is it possible that Buffet is more of a deal maker than a stock picker? These are some thought of mine that may or may not be true.

 

"What I find interesting about your discussion about Buffet is why are you investing your money with ING? If you really believe that the Buffet way is the path to riches, I don't understand why you wasting your resources on ING? Another way for you to get rich from Buffet is to buy shares in BRKB. Hey, they are only about $3600 a share http://finance.yahoo.com/q?s=brkb, or BRKA for about $108000 a share http://finance.yahoo.com/q?s=brka. Go for it! Best Wishes."

 

Like Joe I am interested to see your response to this question.

 

 

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Go for it FT and in two or three years come back and give us a report. You can gloat or fess-up.

Good luck,

Steve

 

 

Well, the early returns are good...I've been at it a year, and it's been a very good year. Of course...a.) one year is an almost meaningless statistical sample, and b.) the year in question was a good year for stocks, so the other part of the test will come the next time the market turns down rapidly. So I'll neither gloat nor cower for the moment, but I'll keep in touch.

 

 

FT,

 

If this were true, why is it that professional managers (with far more time, research, and expertise) have such a tough time doing so?

 

 

Just guessing here, but for starters, a lot of managers don't follow the strict value style that Buffett espouses. For people chasing the stocks of the subprime lenders right now and hoping they're buying a $5 stock that will surely crawl back up to $20, they're likely to get burned, I suppose, much like many of us who bought WorldCom, Enron, etc., back in the day.

 

But if you research value managers who have managed the same fund for five or ten years, you'll find a decent number of them who can and do outperform the benchmarks. In fact, I'd be surprised if there were a manager out there who a.) understood Buffett's philosophy, b.) followed it to the letter, and c.) nevertheless failed to produce decent results, even if not right up there with Sir Warren. But as I'm sure you know, not every so-called "value manager" is created equal. (Heck, even Buffett himself trailed the market badly in the bad old days when dot-coms roamed the earth.)

 

 

FT, your post on Buffet amused me. I guess you think we are the great unwashed that need to be educated. I can assure you some of us here know about Buffet. Have you read the biography on Buffet by Roger Lowenstein? I believe it is out of print now, but it is worth reading.

 

What I find interesting about your discussion about Buffet is why are you investing your money with ING? If you really believe that the Buffet way is the path to riches, I don't understand why you wasting your resources on ING? Another way for you to get rich from Buffet is to buy shares in BRKB. Hey, they are only about $3600 a share http://finance.yahoo.com/q?s=brkb, or BRKA for about $108000 a share http://finance.yahoo.com/q?s=brka. Go for it!

 

 

Joe, I'm sorry you read my post as condescending, and also that you derived nothing but "amusement" from what I wrote. (For a guy who claims to know something about Buffett, it'd at least be nice to spell his last name correctly.) I have read Lowenstein's book on Buffett, as well as Robert Hagstrom's excellent book called "The Warren Buffett Way." I still find Buffett's own writings (in the form of his annual letter to Berkshire shareholders) to be the best way to learn about the man and his philosophy of investment, but both books are excellent, and I'm sure there are many others.

 

You seem sarcastic in suggesting Berkshire's high-priced shares for purchase, but is it really that far-fetched an idea? Consider it an excellent mutual fund (the best ever, perhaps!) with a $3600 minimum purchase. In fact, that's what I did, and I do own a single share of the "B" stock. With a commission of $20 to purchase it, and no annual fees or ongoing expenses, how would such a purchase be a bad idea for anyone?

 

The ING question is fair, and in fact, I'm re-evaluating my investment with them. When I began investing with them, I knew far less than I do now, and I relied greatly on the financial planning component of what my agent did for me. (Disclaimer: I'm well aware that not every agent is a planner, and that the general opinion of agents here is that they are little more than salespeople. I'm simply mentioning this because that was not my experience.) As I seem to need the financial planning less than I used to, the costs become more difficult to justify, and I do have lower-cost alternatives available to me. So while I continue to invest with ING, and I would continue to endorse the person I invested with, I'm not sure if that will be true for ever and ever.

 

 

How does one determine what the "fair value" of a company stock is? I tend to think that especially in this information age, the market instantaneously determines the fair value of each and every stock(There are a lot of investor brighter and with more resources than me who invest their monies to determine the "fair value" of stocks), so I personally invest in index funds where the cost is low and diversification is great. As I mentioned before these index funds have lower risk then a select group of stocks(in one segment of the market), and do not have individual stock risk. Additonally the paper work is less with index funds, versus a large portfolio of individual stocks.

 

Is it possible that Buffet who buys controling ownership of companies has information available to him that is not available to the general public? Is it possible that Buffet is more of a deal maker than a stock picker? These are some thought of mine that may or may not be true.

 

Answering the last questions first, I'm sure that Buffett has "access" that the rest of us only dream of, and that has to be an advantage. It's interesting to read his letters...he's no longer interested in "small" investments, because of the size of the cash hoard that Berkshire is sitting on, so he freely admits he passes on investments that could be very profitable simply because of the scale. In that sense, he says, small investors actually have an advantage over him (though it's certainly tough to think of it that way)! He is certainly more of a deal maker these days, as Berkshire's only purchases are of companies that a.) approach him first, and b.) can offer an 80% ownership stake. But his writings on stock selection remain quite relevant, I would say.

 

As far as determining fair value (and therefore what constitutes a "bargain"), Buffett follows the rules laid out by Graham and Dodd. I tried to get through "Security Analysis," and I'm either not smart enough or just didn't have enough coffee in the house that week. Tough read, in my opinion! Fortunately, there are more accessible books that summarize Graham's approach to valuing stocks, and I'll see if I can post some here later. (Perhaps someone else has a title or two at their fingertips?)

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FT....overall good post defending your position........out of curiosity I am interested in knowing the names of the books that summerize Graham and Dodd approach to value investing.......I think that the understanding the logic would be beneficial.

 

 

Well, the early returns are good...I've been at it a year, and it's been a very good year. Of course...a.) one year is an almost meaningless statistical sample, and b.) the year in question was a good year for stocks, so the other part of the test will come the next time the market turns down rapidly. So I'll neither gloat nor cower for the moment, but I'll keep in touch

 

Are you willing to list your investments to date in this category?, and if you wish the logic ?

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Hi,

FT, if my spelling of Buffett is the only thing you could find wrong with my post, then I am happy because I am a lousy speller. I wasn't being intentionally sarcastic in suggesting that you buy BRK, but it may have come across that way. I just think that putting $3600 down for one share for one company no matter how good is too risky for me. Besides I am sure somewhere is one of my mutual funds I probably own some BRK. I think you would be wise to go slow in playing around with buying value stocks. There is a lot of risk in buying stocks. Best Wishes.

 

Joe

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Again,

 

Forget about theory, show us examples of people who have, are, and will continue to duplicate Buffett.

 

ScottyD

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FT....overall good post defending your position........out of curiosity I am interested in knowing the names of the books that summerize Graham and Dodd approach to value investing.......I think that the understanding the logic would be beneficial.

 

Are you willing to list your investments to date in this category?, and if you wish the logic ?

 

 

Ira, the book I was trying to remember, as it turns out, wasn't about Graham, but actually by him. "The Intelligent Investor" is widely available, and (I thought) pretty readable. You might be especially interested in this comment from a new foreword written by a name everyone seems to trust, John Bogle: "While the activities of investors, the investments of choice, and the ownership of stocks today bear little resemblance to those that characterized the world of investing when Graham wrote this original edition in 1949, the basic principles of intelligent investing that he set forth here have remained virtually intact and unassailable."

 

As for the other thing, I can put together a few trades from the last year to illustrate things, sure...I can also list a few current trades. If nothing else, it'll provide some comic relief, I'm sure!

 

 

Hi,

FT, if my spelling of Buffett is the only thing you could find wrong with my post, then I am happy because I am a lousy speller. I wasn't being intentionally sarcastic in suggesting that you buy BRK, but it may have come across that way. I just think that putting $3600 down for one share for one company no matter how good is too risky for me. Besides I am sure somewhere is one of my mutual funds I probably own some BRK. I think you would be wise to go slow in playing around with buying value stocks. There is a lot of risk in buying stocks. Best Wishes.

 

Joe

 

 

Hi Joe,

 

I guess I don't look at Berkshire as "owning one company." You own Berkshire, it really means you own GEICO, Coca-Cola, Wells Fargo, Benjamin Moore, Fruit of the Loom, Mid-American Energy, Dairy Queen, and a few dozen other high-quality companies. It is, in and of itself, a diversified holding, much more like a mutual fund (except a better one than available just about anywhere else) than it is a company. I appreciate the sentiment about caution in buying stocks; I promise you that as I do so, I'm not "playing around" at all. The late 90's and early 2000's taught me a thing or two about following the crowd blindly.

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Again,

 

Forget about theory, show us examples of people who have, are, and will continue to duplicate Buffett.

 

ScottyD

 

 

I'm tempted to respond by asking you to show me examples of people who have, are, and will continue to do ANYTHING consistently. Human beings are unpredictable creatures, and as I mentioned before, even Buffett himself trailed the market badly when tech stocks were going crazy.

 

When you say "duplicate Buffett," do you mean duplicate his methodology, or his results? As I said previously, he's so clear with his methodology that duplicating it is really just a matter of having the time, the inclination, and the live internet connection to yahoo finance or msn money. Duplicating his results, of course, is a different question. But if you're suggesting that no one should dabble in value investing unless or until they can match Buffett's results, then I would disagree.

 

Really, no theory is necessary to justify value investing. A scan of value funds of all caps, who have been in existence longer than ten years, will yield names of managers who have managed to outperform their index. And that's just mutual funds. Individual investors can (and, I suspect, do) achieve better results than the usual index-fund company line if they're so inclined.

 

Everybody has an agenda. The financial services industry is predicated on making sure that investment sounds like such a complicated science, you NEED to trust (and pay fees, of course, to) the high-priced professionals. Whether those pros are annuity salesmen, actively-managed mutual fund sales professionals, or fee-only financial planners, it's clear to me that people who describe the problem out of one hand and propose to sell you the solution out of the other probably can't be entirely trusted. The only solution for investors is to educate themselves and run their own show. Those who can't or won't be bothered to do so will eventually pay the price...to someone.

 

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Everybody has an agenda. The financial services industry is predicated on making sure that investment sounds like such a complicated science, you NEED to trust (and pay fees, of course, to) the high-priced professionals. Whether those pros are annuity salesmen, actively-managed mutual fund sales professionals, or fee-only financial planners, it's clear to me that people who describe the problem out of one hand and propose to sell you the solution out of the other probably can't be entirely trusted. The only solution for investors is to educate themselves and run their own show. Those who can't or won't be bothered to do so will eventually pay the price...to someone.

 

FT....it looks like your orientation toward investing has changed............and you are looking to control your own destiny, which is great...and not leave it to the hands of someone who probably doesn't have your best interest in mind......one day, you may even become an indexer like most of us here.

 

Thanks for the referral to the intelligent investor by graham. I'ver heard of the book, but I simply did not read it. It will be the next financial book that I will read.

 

 

Really, no theory is necessary to justify value investing. A scan of value funds of all caps, who have been in existence longer than ten years, will yield names of managers who have managed to outperform their index. And that's just mutual funds. Individual investors can (and, I suspect, do) achieve better results than the usual index-fund company line if they're so inclined

 

Various books state that "value' funds outperform "growth" over time, however even though one is able to determine managers who have managed to outperform their index during the last ten year, iindexers tend to believe that "past performance is not an indicator of future performance" and for example these manager may leave the fund, might have been lucky in the past in order to beat the index.

 

When you invest directly in stocks, you are eliminating a lot of cost that managers incur that will give you a significant cost advantage versus managed and maybe even index funds over time, however you will incurr more risk since your portfolio is not as broadbased, plus you will have to deal with the different literature that is mailed to you, as well as handling divident checks, stock splits, and other financial paperwork. You also will incurr individual stock risk (with a smaller base of stocks).

 

 

As for the other thing, I can put together a few trades from the last year to illustrate things, sure...I can also list a few current trades. If nothing else, it'll provide some comic relief, I'm sure!

 

Comic relief no........but probably constructive evaluation.

 

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FT,

 

You are starting to sound like one of us....i.e. "Everybody has an agenda. The financial services industry is predicated on making sure that investment sounds like such a complicated science, you NEED to trust (and pay fees, of course, to) the high-priced professionals. Whether those pros are annuity salesmen, actively-managed mutual fund sales professionals, or fee-only financial planners, it's clear to me that people who describe the problem out of one hand and propose to sell you the solution out of the other probably can't be entirely trusted. The only solution for investors is to educate themselves and run their own show. Those who can't or won't be bothered to do so will eventually pay the price...to someone."

 

When I say duplicate, I don't mean duplicate a theory - I want results. If its so easy to beat the market and be like Buffett, show me others who have. The fact of the matter is that Buffett is an anomaly. The funny thing to me is that statistically speaking we should have MORE Buffett types out there, not less, the fact that we have less is more proof that active management is not a winning game.

 

I am a believer in Value investing, heck I utilize DFA funds - one cannot become more of a value investor than that. However, I believe that utilizing active management is not a good long term strategy.

 

As for advocating complexities to sell services - you're talking to the wrong person. I am an advocate of the Target Date strategy (at least in theory....). I am still waiting for a good set of Target Dates to hit the market.

 

ScottyD

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