Question for Stock Buyers

[Hubbs]

Thanks, tech. By the way, saw this graph a while back and thought you'd appreciate it. The bottom line shows how much of the average mutual fund's portfolio is in cash. The top line is the S&P 500. The vertical dotted lines show you just how smart all those fund managers are.

[Redskins Diehard]

That's okay then. That is a pretty significant rise. Shoulda bought a couple a thousand shares.

And Diehard is kinda right too, though in my mind it's a lot easier to have a ten dollar stock go to 12 then a 100 dollar stock go to 120... though that's an intellectual hiccup on my part that I've never been able to shake.

Your second point really has nothing to do with the cost of trading. A 290 trade carries the same fees whether it is 1 share or 290.

If it is easier for a 10 dollar stock to go to 12 then it is probably easier for it to go to 8 also. Perhaps those kinds of stocks are more susceptible to the wild swings associated with chart readers

[McD5]

•Wide diversification is only required when investors do not understand what they are doing. Warren Buffett.

•Risk can be greatly reduced by concentrating on only a few holdings. Warren Buffett.

Unless you know absolutely nothing about investing, as Warren suggests, there is never a good reason for buying mutual funds, index funds, or anything of the sort. If that were the way to invest, Berskshire Hathaway wouldn't exist, and Buffett would have all of his money in no-load mutual funds. Obviously that isn't the case.

Your best bet always, as Warren says, is to concentrate on only a few positions.

In the Japan scenario, a person could focus on a few holdings, collect dividends if interested, and then increase those dividends and increase safety by selling covered call options against them. You can do that today, in the US mkt with a few blue-chip companies that pay good dividends.

Coke, AT&T and Verizon are three good examples.

As an investor studies more, they can also diversiffy some money into the fixed income arena. I personally had something called a "steepener CD" redeemed by the bank today. It turned out to be a 1 year, 7% FDIC insured CD. It could have extended for more years in time, but the bank called(redeemed) it at their first opportunity.

And in the fixed income arena, never, ever buy bond funds. They are often loaded with junk, and longer duration bonds to increase yield. With individual bonds, whether tax-free or corporate, you always know exactly what you are holding, and you know the exact date on the calendar when they mature.

[techboy]

Hey, McD5, good to see you posting again! I was beginning to wonder if you'd given up after abandoning yet another market timing thread that blew up in your face.

Unless you know absolutely nothing about investing, as Warren suggests, there is never a good reason for buying mutual funds, index funds, or anything of the sort. If that were the way to invest, Berskshire Hathaway wouldn't exist, and Buffett would have all of his money in no-load mutual funds. Obviously that isn't the case..

Three things:

1. Are you Warren Buffett? If not, why try to be him? If Buffett's returns are your goal, just buy some Berkshire. It's odd to me that so many market timing advocates that hold up Buffett as an example of a successful market timer don't own any Berkshire. Do you?

2. Buffett is not a market timer. He is a businessman. He buys lots of shares in companies he knows have good business models, then he joins their boards and uses his business expertise to improve their positions. Again, are you Buffett? Can you do that?

3. Finally, your unsourced quotes are highly misleading as to how Buffett actually feels about investing. Let's see what he actually has to say, since he's being held up as an expert:

Buffett:

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

Emphasis mine. Funny thing for a market timer to say, huh?

More Buffet...

"The best way in my view is to just buy a low-cost index fund and keep buying it regularly over time, because you'll be buying into a wonderful industry, which in effect is all of American industry," Buffett told CNBC anchor Liz Claman.

and

"I have nothing against ETFs, but I really think an index fund that just charges a few basis points for management is pretty hard to beat," Buffett said. "You put it away, you have nobody encouraging you to trade it next week or next month ... your broker isn't going to be on you."

and

Numerous academic studies have shown that individual investors have a bad track record at timing stock-market moves, often because they chase recent performance to their detriment, essentially buying high and selling low.

He even put a million dollars of his own money on the line (for charity) in support of this. He writes at longbets.com:

A lot of very smart people set out to do better than average in securities markets. Call them active investors.

Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore the balance of the universe—the active investors—must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors.

Costs skyrocket when large annual fees, large performance fees, and active trading costs are all added to the active investor’s equation. Funds of hedge funds accentuate this cost problem because their fees are superimposed on the large fees charged by the hedge funds in which the funds of funds are invested.

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.

Emphasis mine.

Oh and one of my favorites, from a 2008 Q&A session:

I realized that technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.

Stop misrepresenting Buffett.

[McD5]

"Buffett is not a market timer."

May 17th, 2010:

Warren Buffett's Berkshire Hathaway sold a lot of stock during the first three months of the year, including more than 31 million shares of Kraft Foods.

It continued to sell shares of many companies that had also seen their stakes reduced in the fourth quarter, although the Q1 cuts are generally smaller than the Q4 drops.

Berkshire's 13-F filing with the SEC shows that as of March 31, 2010, stakes were completely eliminated for:

Sun Trust Banks [sTI 24.86 -0.61 (-2.39%) ]

Berkshire held 2,398,206 shares as of December 31 after selling 681,572 shares, 22 percent of its Q3 stake, during the fourth quarter.

Travelers [TRV 52.40 0.07 (+0.13%) ]

Berkshire held 27,336 shares as of December 31.

United Health [uNH 35.44 -0.24 (-0.67%) ]

Berkshire held 1,175,000 shares as of December 31 after selling 2,225,000 shares, 65 percent of its Q3 stake, during the fourth quarter.

Wellpoint [WLP 56.50 -0.14 (-0.25%) ]

Berkshire held 1,343,820 shares as of December 31 after selling 2,050,393 shares, 60 percent of its Q3 stake, during the fourth quarter.

Holdings were reduced for:

Carmax [CMX 65.0378 0.1922 (+4720608%) ]

Sold 274,100 shares during first quarter, reducing stake by 3.4 percent. Berkshire had cut its holdings by 1 million shares (-11.1%) during the fourth quarter.

ConocoPhillips [COP 55.22 -0.84 (-1.5%) ]

Sold 3,532,081 shares during first quarter, reducing stake by 9.4 percent. Berkshire had cut its holdings by 19.7 million shares (-34.3%) during the fourth quarter.

Costco [COST 62.50 0.17 (+0.27%) ]

Sold 920,637 shares during first quarter, reducing stake by 17.5 percent. No sales during fourth quarter.

Gannett [GCI 12.08 -0.28 (-2.27%) ]

Sold 461,969 shares during first quarter, reducing stake by 21.0 percent. Berkshire had cut its holdings by 1,245,400 shares (-36.1%) during the fourth quarter.

Johnson & Johnson [JNJ 61.81 -0.16 (-0.26%) ]

Sold 3,241,019 shares during first quarter, reducing stake by 11.9 percent. Berkshire had cut its holdings by 9,782,166 shares (-26.5%) during the fourth quarter.

M&T Bank [MTB 88.17 -0.77 (-0.87%) ]

Sold 1,151,779 shares during first quarter, reducing stake by 17.2 percent. No sales during fourth quarter.

Moody's [MCO 24.69 -0.75 (-2.95%) ]

Sold 1,030,734 shares during first quarter, reducing stake by 3.2 percent, as previously reported. Berkshire had cut its stake by 7,404,702 shares (-18.9%) during the fourth quarter.

Procter and Gamble (as foreshadowed in BRK's quarterly earnings report a few days ago) [PG 61.22 -0.57 (-0.92%) ]

Sold 8,406,627 shares during first quarter, reducing stake by 9.6 percent. Berkshire had sold 8,812,599 shares (-9.1%) during the fourth quarter.

Berkshire increased its stakes in:

Becton Dickinson [bDX 73.11 -0.37 (-0.5%) ]

Bought 244,128 shares during first quarter, increasing stake by 16.3 percent. Berkshire had bought 300,000 shares (+25.0%) during the fourth quarter.

Iron Mountain [iRM 21.02 0.16 (+0.77%) ]

Bought 794,800 shares during first quarter, increasing stake by 11.4 percent. Berkshire had bought 3,627,800 shares (+107.6%) during the fourth quarter.

Republic Services [RSG 30.36 -0.86 (-2.75%) ]

Bought 2,537,200 shares during first quarter, increasing stake by 30.6 percent. Berkshire had bought 4,665,500 shares (+128.7%) during the fourth quarter.

http://www.cnbc.com/id/37193732/Warren_Buffett_s_Berkshire_Hathaway_Sells_Lots_of_Kraft_And_Other_Stocks_in_First_Quarter

Not a market timer, eh? He is the ultimate market timer, but fundamental market timer. And always with individual companies.

So why not hold all those companies, and collect the fantastic dividends? Buy and hold is great, right? Why ever sell? Why not just dollar cost average?

So why is he always buying and selling shares of individual companies? And why doesn't he just buy and hold mutual funds?

The comedy never stops.

"Stop misrepresenting Buffet"

Your quotes, taken out of context, are the misrepresentations. Actions speak louder than words. Look at his actions, and how he invests. He constantly buys and sells individual stocks.

[Predicto]

•Wide diversification is only required when investors do not understand what they are doing. Warren Buffett.

•Risk can be greatly reduced by concentrating on only a few holdings. Warren Buffett.

Warren left out: Risk can be greatly reduced by having partial or complete control over the companies in which you invest (assuming you know how to run companies), having the opportunity to leverage other people's money for your own personal benefit, and having the opportunity to collect huge fees for brokering and financing deals between companies. Unfortunately, those are not options for me. I admire Buffett greatly, but his route doesn['t work for very many people.

And in the fixed income arena, never, ever buy bond funds. They are often loaded with junk, and longer duration bonds to increase yield. With individual bonds, whether tax-free or corporate, you always know exactly what you are holding, and you know the exact date on the calendar when they mature.

This is very good advice.

[Predicto]

"

"Stop misrepresenting Buffet"

Your quotes, taken out of context, are the misrepresentations. Actions speak louder than words. Look at his actions, and how he invests. He constantly buys and sells individual stocks.

Please demonstrate that Techboy's quotes were "taken out of context."

[Redskins Diehard]

"Buffett is not a market timer."

May 17th, 2010:

Warren Buffett's Berkshire Hathaway sold a lot of stock during the first three months of the year, including more than 31 million shares of Kraft Foods.

It continued to sell shares of many companies that had also seen their stakes reduced in the fourth quarter, although the Q1 cuts are generally smaller than the Q4 drops.

Berkshire's 13-F filing with the SEC shows that as of March 31, 2010, stakes were completely eliminated for:

res as of December 31 after selling 2,225,000 shares, 65 percent of its Q3 stake, during the fourth quarter.

Wellpoint [WLP 56.50 -0.14 (-0.25%) ]

Berkshire held 1,343,820 shares as of December 31 after selling 2,050,393 shares, 60 percent of its Q3 stake, during the fourth quarter.

Holdings were reduced for:

http://www.cnbc.com/id/37193732/Warren_Buffett_s_Berkshire_Hathaway_Sells_Lots_of_Kraft_And_Other_Stocks_in_First_Quarter

Not a market timer, eh? He is the ultimate market timer, but fundamental market timer. And always with individual companies.

So why not hold all those companies, and collect the fantastic dividends? Buy and hold is great, right? Why ever sell? Why not just dollar cost average?

So why is he always buying and selling shares of individual companies? And why doesn't he just buy and hold mutual funds?

The comedy never stops.

"Stop misrepresenting Buffet"

Your quotes, taken out of context, are the misrepresentations. Actions speak louder than words. Look at his actions, and how he invests. He constantly buys and sells individual stocks.

Hey, that list you put in there must be wrong. I didn't see anything about "Buy DXD on Sept 10th":ols:

[Ancalagon the Black]

Hey, that list you put in there must be wrong. I didn't see anything about "Buy DXD on Sept 10th":ols:

You know, i think McD actually is a market genius. By sheer chance, he should be right about 50% of the time. So the fact that he's wrong 97% of the time cannot be a coincidence.

Something amazing is afoot.

[zoony]

If the United States were a xenophobic and homogenous country with the world's strictist immigration laws and a static population... with no natural resources, severe population densities, and productive capacity at 110%... I would agree. I would predict the same for us as what happened in Japan in 1989.

[techboy]

"Buffett is not a market timer."

That is correct.

So why not hold all those companies, and collect the fantastic dividends? Buy and hold is great, right? Why ever sell? Why not just dollar cost average?

Good question. Let's look at what he wrote in his 1998 Chairman's Letter:

In 1988 we made major purchases of Federal Home Loan

Mortgage Pfd. (“Freddie Mac”) and Coca Cola. We expect to hold

these securities for a long time. In fact, when we own portions

of outstanding businesses with outstanding managements, our

favorite holding period is forever. We are just the opposite of

those who hurry to sell and book profits when companies perform

well but who tenaciously hang on to businesses that disappoint.

Peter Lynch aptly likens such behavior to cutting the flowers and

watering the weeds.

This is a common Buffett quote: "My favorite holding period is forever". As I noted previously, what Buffett does is look for companies that he believes in and have strong potential, then invests in them, and uses his business acumen to add value. If he likes the management, he holds it forever (such as Coca Cola).

If he's selling shares of a company, we can perhaps infer that he no longer likes the management or the company for some reason. That is hardly market timing.

You could call it security selection, because in a way it is, but it's not like you or me doing research to pick a stock. He actually participates in the businesses he buys or sells. He directly affects their value.

Market timing is roulette. Buffett is playing poker.

Again, if you have the business acumen of Warren Buffett, by all means, pick companies.

And why doesn't he just buy and hold mutual funds?

Now you're just being silly. A mutual fund is a vehicle for a small investor to own small pieces of many companies, when he otherwise could not afford to. If I had a billion dollars to invest, I wouldn't use index funds either. I'd buy the entire market and save the (admittedly minimal) costs.

Your quotes, taken out of context, are the misrepresentations.

Weak sauce. You can't refute any of it, so you hide behind claims that I'm taking things out of context. Well, if this is so, please show me how. Provide the full context.

This should be interesting, because in at least one case (the longbets piece), I quoted the entire writing.

You were doing better when you just ignored everything I wrote and pretended it didn't exist.

[zoony]

admit it- this thread was a trap for McD5, wasn't it?

all the people frustrated at his dissapearance from his market timing thread are piling on anytime he posts, lol. It's like an angry mob with pitchforks and torches. I fully expect the fight to spill over into the stadium by year end. (assuming McD continues to avoid the market timing thread)

McD5 (in gameday thread): "Wow, that was a nice pass by Donovan!"

techboy: "You know a lot about passes, don't you? Seeing as how you pass by your market timing thread everyday"

predicto: "LOLz"

McD5: "Another great pass by Donovan! I haven't seen timing like that since Warren Buffet bought and sold for a profit!"

Ancalagon: "Buffet is not a market timer dude"

McD5: "You are out of context"

Rest of ES: "WTF. Guys- there's a game going on"...

[techboy]

McD5 (in gameday thread): "Wow, that was a nice pass by Donovan!"

techboy: "You know a lot about passes, don't you? Seeing as how you pass by your market timing thread everyday"

predicto: "LOLz"

McD5: "Another great pass by Donovan! I haven't seen timing like that since Warren Buffet bought and sold for a profit!"

Ancalagon: "Buffet is not a market timer dude"

McD5: "You are out of context"

Rest of ES: "WTF. Guys- there's a game going on"...

I would like to point out, though, that there are three things wrong with this:

1. I never start this stuff. I only attempt to do damage control after someone has written something financially suboptimal.

2. My motivation in that regard is mostly like a public service announcement, not to trap anybody. I want to share what I know, and perhaps save somebody some money (though I know that almost nobody that doesn't already agree with me is going to listen... how unusual in the tailgate )

3. Most importantly, I only think about football during the game! How dare you?

[Ancalagon the Black]

In our defense, zoony, McD takes the piling on incredibly well. If he were to respond as though he were actually hurt and taking the joshing to heart, I imagine we'd back down immediately.

[zoony]

Apparently McD5 took the "I'm rubber you're glue" thing to heart as a child. Like really, really, really well.

And I'm just bustin' balls TB, I know where you're coming from on your posts.

[techboy]

And I'm just bustin' balls TB, I know where you're coming from on your posts.

Never allow a joke to pass uncorrected, that's my motto. It's why I'm so popular at parties!

[Stillers6SB]

McD5 (in gameday thread): "Wow, that was a nice pass by Donovan!"

techboy: "You know a lot about passes, don't you? Seeing as how you pass by your market timing thread everyday"

predicto: "LOLz"

McD5: "Another great pass by Donovan! I haven't seen timing like that since Warren Buffet bought and sold for a profit!"

Ancalagon: "Buffet is not a market timer dude"

McD5: "You are out of context"

Rest of ES: "WTF. Guys- there's a game going on"...

hilarious!

[Fergasun]

This is a good discussion.

Here's another question. What happens when all of the boomers have to sell their 401(k) to make income?

[Burgold]

Luckily, it won't happen all at once, but will be staggered over a period of years. Also, I know via handling my father's that you sell it off as you need to and not all at once. Some of it isn't even sold, but rather transfered to a non-retirement account. There also should be enough population ready to buy so that it isn't like a run on the stock market.

[chipwhich]

Luckily, it won't happen all at once, but will be staggered over a period of years. Also, I know via handling my father's that you sell it off as you need to and not all at once. Some of it isn't even sold, but rather transfered to a non-retirement account. There also should be enough population ready to buy so that it isn't like a run on the stock market.

That's not necessarily true.

Once you hit the age where you HAVE to withdraw, there is no guarantee the person only withdraws the minimum required. In addition, with the volatility of the market, most seniors are transfer money to instruments lie CD's and savings accounts. They aren't leaving it in the market.

The boomer issue is a concern.

[Burgold]

Yeah, but not all boomers were born the same year. So, some of the change will occur over a period of years. In addition, within that variance some will withdraw a little, others a lot. Remember also, you have to pay taxes on what you withdraw so that's a disincentive to completely dump it all out immediately unless you need it.

[Hubbs]

Yeah, but not all boomers were born the same year. So, some of the change will occur over a period of years. In addition, within that variance some will withdraw a little, others a lot. Remember also, you have to pay taxes on what you withdraw so that's a disincentive to completely dump it all out immediately unless you need it.

True, but the Boomer issue is legitimate in that it will be a structural shift in the net buyers and net sellers of stocks for a long time. For the past forty years, there has been a large cluster of the population who would randomly buy in order to save for retirement. Advances in investing and computer technology means that many of these people were simply putting a percentage of their income into a 401k or an easily-accessible mutual fund every month, having no idea what they actually "bought" with their money. Soon, the opposite will be true for this large cluster of the population. They'll randomly "sell" without even knowing what they're selling, but it will have a downward effect on prices.

[techboy]

The coming boomer retirement (which has already started to a degree) is not only an issue with stocks. It's also going to be a problem for social security (payers in vs. takers out) and other areas.

I find the immigration debate a little sad because in 10 to 20 years we'll probably be offering incentives to people to come here. An inverted pyramid for a population chart is not a good thing (and is one of Japan's problems).

[Predicto]

I'm just kind of sad that I apparently provide nothing to the Tailgate except saying "LOLz"

LOLz!

[Elessar78]

Going back to Buffet, and investing in general: stocks are simply pieces of ownership of a particular company.

Any person who buys a stock IS a business owner. I think a lot of people lose track of that when they buy stocks and just treat it as a "buy low/sell high" proposition. WB owns companies and, like any other owner of any other business, he gets to keep some of the profits.

Now how come there aren't more WBs? His methods aren't really secret and actually very public about what he looks for in companies he buys.