You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.- Warren Buffett
Investing Style
What do Warren Buffett, Carl Ichan, George Soros and Jim Simons have in common? Each of them have made stupendous wealth investing in financial markets. But then again each of them have a completely different approach to investing! Closer home we can also find a similar pattern. In fact, from the success stories of most of the investors it seems that Investing is more about a disciplined approach. There is no one size fits all. There are many styles of equity investing. Some people believe in buying good quality growth stocks others buy only those stocks which are very cheap there are some who combine these two factors. Then there are others who buy stocks with earnings momentum. Done in a methodical way each of these approaches have created immense wealth.
Let me try and classify some of the most popular investing styles in a simple way. I would like to put Investment Styles in two main buckets. Buy & Hold Investing and Active Investing. The Buy & Hold type of Investors, as the name suggests, like to hold their stocks for a long period. Philip Fisher Investing is one such example. The Active Investors like to move in and out from stocks always looking for better ideas based on their investment thesis and consequently they are fairly active in the market, hence my classification.
In this Four-part series, I will talk a bit about the Buy & Hold Investing Style. What better way to start the series than by covering the latest Letter of Berkshire Hathaway which was published this weekend.
Here are some interesting points made by Mr. Warren Buffett in the letter, which I quote Verbatim:
Bonds more risky than Stocks?
Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. “Risk” is the possibility that this objective won’t be attained
I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.
It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.
Markets Can be Irrational in the Short Term : Disregard Greed and Fear
Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.
We will stick with our simple guideline: The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.
Picking Good Quality stocks at Good Price
Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well.
In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.
…No Leverage
Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.
In the next parts of this series, I will discuss, in a bit more detail the virtues and the problems with the Buy & Hold Investing Style. By the way, the last MOJO TALK on Philip Fisher style of investing was a also a version of Buy & Hold Investment Strategy.
Sanjeev Mohta
Market Expert
Sanjeev Mohta is the Market Expert at Marketsmojo. He has over 27 years’ experience in Investment Research and Fund management across Asian Markets and Asset classes. He has worked in various organisations in Singapore and India like Alchemy, QVT, Jefferies, ABN Amro and HSBC Securities. He Has a PhD in Economics from Tulane University, USA.