PRESENTATION RECAP @ 28/09 And THE PERILS OF BUFFETT INVESTING PART 1/2 via The Asia Report
I did a presentation earlier this week to a small gathering of value investors on Deep Value Investing: How The World’s Best Investors Beat The Market.
I used to do these presentations regularly during my time in UCL (University College London). Its always great fun to share what I’ve learnt over the years. I get to review and re-look the concepts that deal I with daily.
Teaching has always been the best form of learning for me.
One of my favorite parts about these sharing sessions is the Q & A.
There’s a huge gap between theory and practise. Something which I struggled with when I first started too. I remember having an accounting related question on Free Cash Flow vs Owners Earnings that was unresolved for over two years.
I touched about how big that gap can be briefly in my podcast on the perils of index investing, and why its so hard.
You can check it out here:
One of the members of the audience had a great question which commonly comes up:
IS IT BETTER TO BUY CHEAP COMPANIES AT GOOD PRICES,
OR WONDERFUL COMPANIES AT FAIR PRICES?
WHAT WARREN BUFFETT THINKS
He’s said this a number of times over the years in various interviews. Here’s the thing though.
I don’t think this is an end all be all statement that conclusively settles the debate. Let’s consider a few things:
- Academic research shows that investors who invest in “wonderful companies” tend to under-perform “terrible value companies”
- Buffett’s track record running his investment partnership far exceeds his track record when he changed styles at Berkshire Hathaway in the last 2 decades
- He has bought “cheap stocks” from time to time in his own personal account
I tend to find that wonderful companies are easy to spot. Markets tend to be very good at identifying such companies.
What they are not so good are at pricing them appropriately, and investors often end up paying too much for growth.
Not to mention that companies with true “competitive moats” are not easily identifiable.
THE ONLY THING THAT IS CONSTANT IS CHANGE
Industries change. Technology changes. What’s a moat might not be one 10 to 20 years from now. Buffett has invested in plenty of companies that have seen their moat being eroded over time.
That’s probably why Buffett tends to stick with things that tend to change glacially.
Like food & consumer products (Kraft, Gilette, Coca-Cola), transport (BNSF), and retail banking (not investment banking!) operations (Wells Fargo, Bank of America).
He’s gone out on a limb to say that he doesn’t invest in technological companies. IBM doesn’t count in my book. If you read his interviews, he tends to see it more as a service provider. But that’s a story for another day.
At the end of the day, I think the peril of investing like Buffett is that we are not Buffett.
He took decades before he slowly shifted to his current style of investing, has an unparalleled network, incredible intellect and a vast amount of knowledge accumulated from decades of non-stop reading.
SO WHY DOES BUFFETT BUY GOOD COMPANIES AT FAIR PRICES?
My own opinion is that is a constraint he faces in his opportunity set. He has tens of billions to deploy, and billions more coming in yearly. A good problem surely, but his universe of stocks are limited to those in the S & P 500, and maybe some private companies.
Buying cheap stocks wouldn’t move the needle for him at all.
His lack of investment opportunities at his size is really shows in his relative under-performance compared to his early days managing small sums of money.
Finally, I think there’s a huge distinction between buying a company and buying a stock. If I were a CEO, I wouldn’t want to buy a lousy run-down company too. Think about the headaches of turning it around.
But as the last post highlights, investing in stocks is very different from investing in a business.
Investing in “cheap cigar-butt stocks” might not be fanciful, but where they excel in are the relative ease in which a determined investor can succeed.