Category Archives: Value Investing

Lessons From Warren Buffett: Don’t Try and Sell to Buy Back Later at a Lower Price

You picked a winner and it’s shot up through the roof. Time to sell and buy back later at a lower price?

Warren Buffett and Charlie Munger advise against it.

“Generally speaking, trying to dance in and out of the companies you really love, on a long term basis, has not been a good idea for most investors” Charlie Munger explained at the 1999 Berkshire Hathaway Annual Meeting.

Warren Buffett concurred: “It’s pretty tough to do,” Buffett added. “You have to make two decisions right…you have to sell it right first, and then you have to buy it right later on….If you get in to a wonderful business, best thing to do is stick with it.”

Buffett and Munger’s full explanation on trying to sell and buy back

See the complete Lessons From Warren Buffett series

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Lessons From Warren Buffett: There’s No Set Formula for Knowing Whether the Market, or a Company, is Undervalued or Overvalued

Warren Buffett places a strong emphasis on a company’s intrinsic value in determining whether the company should be purchased in whole or in part. Whether a company is undervalued or overvalued is at the heart of knowing whether it is a good investment. The same applies to the stock market as a whole.

So, is there a straightforward formula that you can use to determine valuation? Not according to Warren Buffett.

“It’s not reducible to any formula where you can actually put in the variables perfectly,” Warren Buffett explained at the 2017 Berkshire Hathaway Annual Meeting. “It’s just not quite as simple as having one or two formulas and, then, saying the market is undervalued or overvalued, or a company is undervalued or overvalued.”

As he noted, you can have a formula, but the hard part is knowing what variables to put in.

Warren Buffett’s full explanation on determining valuation

See the complete Lessons From Warren Buffett series

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Lessons From Warren Buffett: Investing Doesn’t Need to Be Complicated, but It Needs This Essential Element

You don’t have to be a genius to be an investor, is something that Warren Buffett has said many times. However, there are things that he thinks are core qualities of successful investors.

So, what is it that Warren Buffett thinks is essential? Discipline.

“What we do is not a complicated business.” Buffett explained at the 2018 Berkshire Hathaway Annual Meeting. “It’s got to be a disciplined business, but it doesn’t require a super IQ, or anything of that sort.”

Buffett’s full explanation on being a disciplined investor

See the complete Lessons From Warren Buffett series

© 2021 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Lessons From Warren Buffett: If You Want to Be a Good Investor Try Running a Lousy Business for a While

There is no one that wants to have a lousy business, but as Warren Buffett points out, you certainly learn a lot of lessons from it. Among the things you learn are “how awful it is, and how little you can do about it, and how IQ does not solve the problem…”

As Buffett noted: “I really think if you want to be a good evaluator of businesses, an investor, you really ought to figure out a way, without too much personal damage, to run a lousy business for a while,” Buffett explained at the 2017 Berkshire Hathaway Annual Meeting. “I think you learn a whole lot more about business by actually struggling with a terrible business for a couple of years than you learn by getting into a very good one where the business itself is so good that you can’t mess it up.”

Buffett’s full explanation about learning from running a lousy business

See the complete Lessons From Warren Buffett series

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Lessons From Warren Buffett: Here’s What to Pay Attention To

The Dow is up 200 points, or it is down 150 points, when you turn on the nightly news the overall stock market’s gyrations are what gets attention. Is it what you should be paying attention to?

Not if you want to invest like Warren Buffett.

“Charlie and I don’t think about the market. And Ben (Graham) didn’t very much. I think he made a mistake to occasionally try and place a value on it,” Buffett explained at the 1999 Berkshire Hathaway annual meeting. “We look at individual businesses, and we don’t think of stocks as little items that wiggle around on the paper and have charts attached to them. We think of them as parts of businesses.”

Buffett’s full explanation on focusing on individual companies rather than the market

See the complete Lessons From Warren Buffett series

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Lessons From Warren Buffett: You Can Go Broke Short Selling

A company’s stock price goes up and up, seemingly disassociated from any meaningful metrics of valuation. So, should you short it?

It may be tempting, but Warren Buffett advises against it.

“Short selling, it’s an interesting item to study because it’s, I mean, it’s ruined a lot of people. It’s the sort of thing that you can go broke doing,” Buffett explained at the 2001 Berkshire Hathaway Annual Meeting. “Being short where your loss is unlimited is quite different than being long something that you’ve already paid for. And it’s tempting. You see way more stocks that are dramatically overvalued in your career than you will see stocks that are dramatically undervalued.”

Buffett’s full explanation on short selling

See the complete Lessons From Warren Buffett series

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Lessons From Warren Buffett: Hold a Stock Forever or Sell It?

Warren Buffett has said his favorite holding period to own a stock is forever, but often that get misinterpreted as Buffett never sells. Nothing could be further from the truth. While it is true that Buffett’s massive positions in Coca Cola and American Express have been held for decades, he has sold numerous positions over the years, including his holdings in Phillips 66 and IBM, for example, and most recently he sold the large positions he built up in airline stocks, including American, Delta, United and Southwest, after COVID-19 impacted their prospects.

All things being equal, Buffett notes “It’s not their inclination to sell,” however, he sells stocks all the time.

What makes Buffett sell a stock rather than hold it forever?

One factor is whether the company has had a negative change in its competitive advantage.

“We probably had one view of the long-term competitive advantage of the company at the time we bought it, and we may have modified that,” Buffett explained at the 2002 Berkshire Hathaway Annual Meeting.

He went on to add: “That may mean that we were wrong when we made the decision originally. It may mean that we’re wrong now, and their strengths are every bit as what they were before. But, for one reason or another, we think that the strengths may have been eroded to some degree. A classic case on that would be the newspaper industry, generally, for example. I mean, in 1970, Charlie and I were looking at the newspaper business. We felt it was impregnable a franchise as could be found.”

If the stock you are holding has strong revenues, is cranking out dividends, and has a bright future, there is no need to set an arbitrary selling price. As Buffett once said, “The real thing to do with a great business is just hang on for dear life.”

However, if the company’s prospects are deteriorating, there is no need to hold it forever.

Buffett’s full explanation on when he sells a stock

See the complete Lessons From Warren Buffett series

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Lessons From Warren Buffett: Don’t Let This Error Take You Out of the Game

Warren Buffett is fond of baseball analogies. He’s often spoken about an investor being like a baseball batter waiting for the right pitch. He notes that the advantage the investor has over the batter is that there are no called strikes. You can wait for just the right pitch before swinging your bat.

It is a straightforward concept, and speaks to the patience and discipline that good investors should have.

However there is a flipside to waiting for a great deal, and it is an error that Buffett warned about at the 2011 Berkshire Hathaway Annual Meeting. The flipside is thinking that every investment you make, every stock that you buy, has to be an absolute home run.

“One of the things, one of the errors people make in business, and sometimes it can be a huge error, is that they try and measure every deal against the best deal they’ve ever made,” Buffet said. “So they say, you know, I made this wonderful deal for, maybe, an insurance policy written, or it might be a company bought, it might be a stock bought, and they’re determined that they’re never going to make a deal that isn’t that attractive in the future. So, they in effect, sometimes take themselves out of the game.”

For Buffett, it is all about the opportunities that are available to the investor at a particular time.

As Buffett noted, opportunity costs are different for every investment.

“The goal is not to make a better deal than you’ve ever made before. The goal is to make a satisfactory deal that’s the best deal you can make at the time,” Buffett explained.

So, don’t let the search for the perfect investment be the enemy of the good investment.

See Buffett’s full explanation of opportunity costs as it related to five different Berkshire Hathaway investments.

See the complete Lessons From Warren Buffett series

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Value Investing: Overcome Your Fear, Don’t Be Doomed to Mediocre Returns

Part of an occasional series on Value Investing

Fear. It’s the one word that summarizes the emotion that grips investors when times are bad, really bad. Fear is the emotion that takes rational, prudent decision-making out of the investing process. It’s the whipsaw to the euphoria and overconfidence that comes when times are good, portfolios are fat, and almost every investment opportunity looks like a good one.

Warren Buffett famously said that his investment strategy was founded on seeing fear in the marketplace as a tremendous buying opportunity.

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful,” Buffett wrote in his 1986 Letter to Shareholders.

Berkshire Hathaway’s vice chairman, and noted investor, Charlie Munger, has long expounded that periodic steep market declines are inevitable, and that unwillingness to withstand them is the road to poor performance.

In a 2009 interview with the BBC, Munger said:

“This is the third time that Warren (Buffett) and I have seen our holdings of Berkshire go down, top tick to bottom tick, by 50%. I think it’s in the nature of long-term shareholding, of the normal vicissitudes in worldly outcomes and markets that the long-term holder has his quoted value of his stock go down by say 50%. In fact you could argue that if you are not willing to react with equanimity to a market price decline of 50% 2-3 times a century, you are not fit to be a common shareholder and you deserve the mediocre result that you are going to get, compared to the people who do have the temperament who can be more philosophical about these market fluctuations.”

Diversification: Your Tool For Overcoming Fear

So, how can you overcome fear? It’s wired into us. It’s not intellectual, it’s emotional. It’s the flight part of fight-or-flight response. Overcoming fear is easier said than done, but here is a suggestion.

Trust the power of diversification. If you are buying index funds, such as S&P 500 index funds, know that the entire U.S. economy is not going away. It’s already survived the Great Depression, Great Recession, and a host of lesser known financial crises that run all the way back to the Credit Crisis of 1772. As, Charlie Munger pointed out, you have to expect that steep price declines will happen a number of times during your lifetime.

Warren Buffett has always believed in the power and resilience of the U.S. economy. He points out that in his own lifetime it has survived World War II and a host of other challenges, including over a decade of inflation in the 1970s and early-1980s, when mortgage rates peaked at over 18%, and has come back stronger.

“Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater,” Buffett said in an interview on CNBC in February. He urged investors, even small investors to see price declines for the opportunity that they are.

Remember it’s buy low and sell high, not the other way around.

The resiliency and long term strength of the U.S. economy, in other words the power of businesses as a whole to meet needs and solve problems, enabled the Dow Jones Industrial Average to not only survive a loss of 90%, but to rise from its Great Depression doldrums of a low of 41.22 to the record high 29,551.42 set on Feb. 12, 2020.

As shocking as a DJIA number in the 40s seems to us today, it’s not the Dow’s all-time low, which was 28.48 on August 8, 1896. Thus, you don’t need a century of lifespan to prosper investing in the stock market. An investor that prudently bought at 28.48 in 1896 was still up roughly 45% when the DJIA hit its depression era low.

Given enough time, the strength of the economy has proven time and time again the value of investing in equities.

“Most people are savers, they should want the market to go down. They should want to buy at a lower price,” Buffet notes.

So, get a hold of your fear and turn it into the courage to see the opportunity that is right in front of you.

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Value Investing: Don’t Buy a Pig in a Poke

(BRK.A), (BRK.B)

Part of an occasional series on Value Investing

Don’t buy a pig in a poke. It’s an old expression that traces its usage to the Middle Ages when unscrupulous merchants would sell what was supposedly a suckling pig to unsuspecting victims only to have them later find that their bags contained a cat or a dog.

How does that apply to Value Investing? Simple. Know your investment.

If you are a Value Investor your goal is to understand what a business is, not just what it claims to be, or what others say it is.

Before you invest, have you closely studied the stock you are buying?

What are the past 10 years of earnings? Are they consistently growing?

What is the return on equity?

What does the company do with retained earnings?

Have you read the past 10 years of annual reports?

How strong is the management team? Do they align with shareholders’ interests?

What is the company’s intrinsic value?

What is the company’s price history? Can you provide a reason why you should buy now?

If this all sounds like too much work, there’s nothing wrong with building a balanced portfolio of index funds. However, if you are the kind of investor that likes to hunt for opportunities, likes to know about the individual companies you are buying, and doesn’t want to buy a pig in a poke, then answering these questions will be essential to using a Value Investing approach.

There’s a whole financial industry designed to take the thinking out of investing. Whether it is from talking heads on TV or the Internet, or investment company recommendations, and they can be a poor substitute for your own research and your own studious analysis.

In the end, it comes down to knowing your investment, so you don’t buy a pig in a poke.

Or as Warren Buffett once said: “Any time you combine ignorance and borrowed money you can get some pretty interesting consequences.”*

*1994 Berkshire Hathaway Annual Meeting

© 2019 David Mazor


Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.