Saturday, 31 October 2015

Blinded by Buffett: Why Buffett May Have Done More Harm than Good to Stock Investors

When it comes to stock investing, the one name which commands most admiration is Warren Buffett. Indeed, Buffett is the greatest investor that stock markets over the world have witnessed, yet he may have done more harm than good to stock investors.

Swarms of investors—both new and experienced—live by Buffett's wisdom. In this process they tend to apply his tenets of investing, about which they come to know through the annual reports of Berkshire Hathaway. Mountains of books have been written on Buffett's style, the primary source of which is again his speeches in Berkshire's annual letters.

Assuming that the content about Buffett in circulation is correct, the problem with aping Buffett's methods remains that most people can't imitate them. Take the concept of “moats,” for example. A moat is a company that has some competitive advantage that can't be encroached upon. Novice investors, and for this matter even experts, don't have an idea of how to find out moats. I have seen people interpreting just anything as a moat and then feeling proud of their intelligence. Though the stock price keeps sliding due to lower profitability, the “value investor” keeps clinging to the stock in the hope that it's a multi-bagger with some “temporary” problem.

The availability of role models, like Buffett, is both a good and a bad thing. Sure we all can learn something from our role models. However, when we try to imitate them, we may not succeed. What works in the stock market is originality and a well-crafted stock strategy that you can stick to. You must find your own winning formula. There are multiple ways in which you can make money in the market, so you need to find one that works for you. What worked for Buffett may not work for us, for we don't have his mind.

Neither do you need to set Buffett as your benchmark. Most small stock investors buy just a few shares of a company, unlike Buffett, who buys the entire company. Though his investment track record may be enviable, yet you should aim at getting “good” returns rather than “Buffett-like” returns. This simple change in mindset will increase the chances of your success manifold. 

The simpler your approach is the better it is. Complex models and methods are not only difficult to implement, the market also doesn't care about what method you are using. We need not be Buffett;  we can succeed in the market being ourselves and following our methods as well.

Saturday, 17 October 2015

Returns vs. Offer: Why You Should Not Be Very Happy about Your Returns?

Booming markets see a lot of people beaming with pride because their portfolios have gained significantly. As bulls take charge, the grin on investors' faces only gets wider, as they see their portfolio worth inching upward. On the other hand, in bear markets many of us shy away from discussing our portfolio performance. This is because our portfolios are losing money and hence showing negative “returns.” The so-called “returns” figure seems to have become the benchmark of success in investing in spite of the fact that it is highly flawed.

The “returns” figure on which many of us focus so much is an illusion. If your stock portfolio is up by 10 percent, it means nothing! You haven't got that money in your hand. Similarly, just because your portfolio is down 10 percent, that again means nothing; you won't lose a penny unless you sell. Moreover, given the nature of the market, it’s foolhardy to read too much into your returns figure because they can fluctuate wildly. Today your portfolio is up 10 per cent; tomorrow, it may be up 8 per cent; a week hence, it may be down 5 percent. Even one good or bad year can severely impact your multi-year returns. All in all, the “returns” figure is highly unreliable unless those returns have been booked.

Interestingly, the word “returns” is a wrong word to use because you haven't gotten anything in return; what actually have is an “offer”—an offer to sell your stocks and you will gain/lose so much. Unless you act on the offer, you haven't made or lost any money.

The implication works both ways. Don't get too happy because your portfolio is showing a positive offer and don't get too disappointed because the offer is negative. The market comes to you every day with an offer, and that's how it is. Only when you sell your stocks does the offer become your returns. That means to make money in the stock market you are very much expected to sell your stocks. Buying a good stock is only half the thing. Knowing when to sell is as much important as, if not more than, knowing when to buy. The key to making money in the market is summed up below:

  1. Spotting good companies available at a bargain
  2. Holding onto their stock till it gets appropriately priced
  3. Selling it
  4. Putting the proceeds back in other good companies trading at a bargain
  5. Repeating the above steps

So, don't get too excited (or dejected) about your “offer.” Accept the offer when it's the right time to do so. Once you have made “real” profits, that’s the right time to tell everyone about your “returns” with an inflated chest.