Monday, March 12, 2007


The Long and the Short of it

If you decide that direct share investment is for you, there are essentially two main approaches to investing in stocks. One is the approach of the long term investor, the second that of the short term trader.

The long term investor seeks out companies whose share price is likely to increase over the long term, purchases share in those companies... and waits! A strategy known as "buy and hold". Returns for the long term investor are usually modest - but as the name suggests, he's in it for the long term and relies on time to grow his nest egg into something substantial.

Once this was really the only way for the private investor to approach the sharemarket. It's only in relatively recent times, with the advent of the personal computer, the Internet and access to downloadable market data that a more active short term approach has become viable.

Warren BuffetEasily the most famous - and successful - long term investor is Warren Buffet, no less than the second richest man in the world due to his application of the buy and hold philosophy. (Of course, Buffet achieved this lofty position by investing other people's money - not just his own.)

Recently, the media had a field day when Buffet donated a large part of his fortune to the Bill Gates Foundation - Gates being the first richest person in the world!

Here's the Sydney Morning Herald coverage...

Buffett the benevolent beast of Wall St

David Potts July 2, 2006

He's driven the pundits crazy for years and now has delivered one last slap.

WARREN Buffett, the world's second-richest man, will start donating most of his wealth next month to the world's first richest, Bill Gates of Microsoft. Talk about good mates.

"It sounds pretty funny," as Buffett admits. But the donation is for charity. It's just that most of it will go via the Gates Foundation.

"He's better than me at giving money away," Buffett quipped.

Anyway, the donations will be shares in his company, Berkshire Hathaway, the world's most expensive listed stock. The A class stock trades at more than $US90,000 ($123,000) a share.

So if Buffett, a folk hero in financial circles who was once derided as a fuddy-duddy for having nothing to do with the dotcom boom, is giving his shares away, what does that say for his view on global sharemarkets?

Sorry, but nothing.

We already know he thinks Wall Street is too pricey, but then he says that about any stock trading above what he'd buy it for. And he'd only buy it if it were undervalued.

His investment philosophy, which has returned on paper an annual 22 per cent for 40 years, is best summed up in one word. Asked how he knew the best time to sell a stock, he replied: "Never". He makes long-term look like next Tuesday.

He's only failed to beat the market six times, twice in the dotcom boom - where he had the last laugh.

You can buy Berkshire Hathaway shares through online brokers such as CommSec or Fortrend Securities for about $US60 brokerage. The New York Stock Exchange code is BRK.

An alternative is the Global Masters Fund, which has a portfolio of 80 per cent Berkshire Hathaway (the rest is cash and fixed interest) and trades on the stock exchange under the code GFLS. The $1 units are trading at about 97 cents.

Should you buy the shares?

It's a big whack - though helpfully there are also baby Berkshire shares, the B class, which are a 30th of the value and have almost no voting rights. They're trading at just over $US3000 a share.

Neither pays a dividend, nor is likely to if Buffett has any say. And he has.

Berkshire Hathaway's main operating business is insurance, though it has a huge investment portfolio of icons such as Gillette and Coca-Cola.

The insurance subsidiary, General Re, has an unwelcome connection with Australia. Its deals with FAI indirectly led to the collapse of HIH. As it happens, General Re is in a spot of regulatory bother in the US, too.

Worshipped by small investors, Berkshire is no darling of Wall Street and isn't even counted in the Dow.

Critics wonder what will happen post-Buffett and, against the evidence, don't see it as a growing business.

Besides, as a rule Wall Street doesn't like conglomerates - especially a two-man band conglomerate. It likes big, but not lots.

Most of all it hates the fact that Buffett is sitting on more than $US40 billion, earning very little.

With rising interest rates and an erratic Wall Street, that could also be seen as a big positive.

Certainly having too much capital is a unique problem.

Buffett's own worry is that hedge and private equity funds are pushing up share prices too far, pricing Berkshire out of the market.

So Wall Street wants him to buy more, but won't let him.

Then there's the question of whether by running down his 31 per cent holding to just 5 per cent, Buffett's philanthropy will depress the share price.

"I don't think so in the least - and that's true even though the annual turnover ratio for Berkshire has been running only about 15 per cent a year, which is extremely low for large cap stocks," he told Fortune magazine.

"Let's say the five foundations sell all the stock they get this year. If trading volume continues as it has, their selling will raise turnover to less than 17 per cent. It would be ridiculous to think that much new selling could affect the price of the stock.

"In fact, the added supply could even be beneficial in increasing the stock's liquidity."

Which leaves the exchange rate, since buying Berkshire shares would mean you're punting on the Aussie falling against the US dollar.

But get this. You'd also be punting against Buffett, and so perhaps against yourself. That's because he thinks the US dollar will fall.

If it's any help, so far he's been unusually wrong about that.


"Drawing obscene pay for mediocre business achievements."

"(Sidekick Charlie Munger and I) work together. We really don't have any choice because he can hear and I can see."

Fund managers
"They would shudder ... at the thought of their own performance and fees being closely inspected by their own boards."

Berkshire Hathaway
"My hope was to make several multibillion acquisitions ... but I struck out."
Berkshire Hathaway's AGM: "Woodstock for capitalists."

How to be a millionaire
"My advice is to read everything and to start young."

"It's better to pay attention to something being scorned than something being championed."


The main problem with the long term buy and hold approach is that you need to be very astute in your selection of stocks. After all, if you're counting on holding those shares for years - or indeed decades - you better be sure you've backed the right horse.

Your financial future depends on it - and the opportunity cost could be enormous.

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