Thursday, January 13, 2005

Article of Interest

I have posted below a replication of a newsletter I received today. It describes some of Warren Buffett's investment thoughts. It is a good read. Here you go:

"Dear Investor,

It's a New Year. Let's resolve to make it the best year ever for our investments.

I have already made one investment resolution for myself this year. To read the biographies of the most successful investors and learn from their commonalities.

I've already started...

I read a book on George Soros, which I told you about, and just completed Roger Lowensteins book on Warren Buffett last night.

Buffett's Punch-Card

Buffett told a story that I'd like to share with you. He suggested to imagine your investment lifetime as a punch card with twelve holes on it. Those twelve holes represent the 12 best investments that you can make during your life. If you punch those twelve holes you'll end up rich beyond your wildest dreams.

Buffett has been punching his punch card by buying stocks when they were cheap and undervalued and then selling them when he thought the market became frothy.

He opened up a hedge fund in the 1950s and bought stocks when they were cheap and undervalued and then closed it and returned his money to his partners in 1969 when he thought the market was dangerously high and he could no longer find undervalued stocks.

He then stayed out of the market until 1973 near the bottom of the 1970s bear market. Imagine, 4 years of waiting for a man who's life was the stock market.

He bought back into stocks and held through the 1980s and 1990s. He has since trimmed back on his stock holdings holding the highest cash position since the 1970s and has made giant bets against the US dollar.

The key to this is patience.
Buffett had an investment method that required him to buy stocks when they were fundamentally undervalued. This wasn't always the case. So, when stocks were overvalued he stayed away from the market and waited patiently.

He was not simply a buy and hold investor like Wall Street tries to portray him. He didn't just buy some mutual fund or index fund and expect it to go up forever.

He had a method and a plan and stuck with it. 12 punch holes. And all he did was wait patiently until an opportunity to punch one of those holes came.

He didn't lose his hole puncher lose his equity by being impatient and buying stocks just to make a trade. He waited until the market came to him. And he knew when to get out. He didn't sit and let his stocks fall to nothing in a bear market.

He acted as the opposite of the 1990s Internut investor who bought overvalued stocks and then was misled into holding on to them by the Wall Street hype machine.
Make it Work for You
The key to this is that every successful investor and even the moderately successful have a method that works. That is the punch card and the holes in the punch card represent the best investment opportunity every two years that matches all of the criteria of your method.
Now the problem is that people aren't patient enough to wait and deploy their capital only for those best opportunities. To buy low and sell high you have to wait until things are low. You cant just buy because you're bored.

When one of the punch card holes comes, most people fail to take advantage of it. Why not?
More often than not - they simply cant. Their money their hole puncher is tied up in other investments that aren't as good or even worse has been lost to a bad investment that never should have been made in the first place but was made because of boredom or a need to be involved in the market. They lose the opportunity because, like a gambler, they have to always be in the game.

It's all about patience. It is just that simple. My investment method involves looking for dominant market trends and then taking advantage of them when they line up.
Right now, I think the most important trend in the market is a falling dollar and subsequent bull market in gold. This is going to be one of those punch holes in my investment lifetime this is why I have been talking about gold so much.

However, at the moment gold is in a correction and the dollar has had a temporary rally above its 30-year support level. This correction will lead to an incredible buying opportunity in gold but it requires patience to let it run its course.

So, in true Buffett fashion, I'm just sitting back and letting it come to me.
The broad market is also undergoing a correction. The Nasdaq and DOW have been falling since the beginning of the year. It is time to step back and let the market fall. Don't try to time bounces or put on investment positions now. We are likely to see the market digest last years gains this quarter. Be patient here too.

Perhaps you should spend this time planning ahead. Planning out how you are going to buy gold or other sectors in the market. Find out which stocks you like and plan out how much money you want to put in them. Then let them come to you."

I don't' agree with everything the writer said, but the main part about my arch nemesis was good enough to pass along. The fact of the matter is that a value investor has to wait for his/her stocks to come to them. Don't chase a stock upwards. Wait for "intelligent" points of entry, which will usually be around support areas.

Best Regards,

The Soothsayer of Omaha

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