Understanding Investing

I have been listening to Warren Buffet talk at University of Florida’s business school in 1998. It is available on YouTube.  He has useful information about investments and timing.

  • If you buy good businesses, paying a little too much won’t matter in the long run.
  • If it is a good business you will have it for the long run.
  • If it is not a good businesses, there is no price low enough to justify the buy.
  • There are always good reasons not to buy.  They don’t matter over a long time.
  • If you care about the stock market staying open for the next five years, the stock you are buying may not be your best choice.

He uses the performance of Coke as a point in his discussion.

It went public in 1919 at $40 per share.  While he does not deal with 2012 I found a discussion about the value of Coke.  If you bought it in 1919 and kept it to 2012, with reinvested dividends, the $40 would be $9.8 million.  (14.3%)  But suppose you had waited a year and bought it at $19 in 1920 (15.2%)  Better, but maybe not so different that is worth the risk of forgetting about it.  Or maybe deciding it was down and not looking good or whatever excuse would have prevented the buy.

Buffett’s wisdom is buy good businesses at reasonable prices and keep them.

He talks about buying cheap. If you buy a lousy business, even cheaply, and keep it for a long time, it will still be a lousy business.  Time is the friend of the good business and the enemy of the weak one.

He talks about diversifying.  He thinks owning stock in six great companies is enough.  “No one ever got rich with their seventh best stock.”

Years ago I tried to infer his investment strategy.  One of the points was the idea of a natural franchise.  Something that makes it hard to compete against.  Many of his investments have that characteristic.  In the talk at Florida he talks about businesses with a moat.  His instruction to management is make it wider.  If someone seems to be competing, fill it with alligators and sharks.  Always run the business to make the moat wider and harder to cross.

In Berkshire businesses one of the moats they build is cost leadership.  It is very hard to compete with the cost leader when they work at expanding their lead.

At the time he gave the talk, Long Term Capital Management was dying.  His thought – They had 16 people who together were smarter than any other 16 people in any business in the country.  They had experience.  They had their own money in play.  And they failed.

“But to make money they didn’t have and didn’t need, they risked what they did have and what they did need.”

Consider sufficiency when investing.  Investing should include an element of what does the extra money mean to you.

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

Contact: don@moneyfyi.com  705-748-5181

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