Tips to Succeed in Stock Market

One thing that has always puzzled me: If Buffett's methodology works so well, how come there's only one Buffett?

-HW "Skip" Weldon Columbia, SC

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Let's not forget that Buffet buys "at a steep discount to intrinsic value" as part of the whole Estate Tax fiasco. No wonder he opines against its repeal.

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"Gil Faver" as part of the whole Estate Tax fiasco.

Eh? I miss the connection between buying at a steep discount to intrinsic value and the "whole Estate Tax fiasco". -- Doug

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An excellent question. Buffett claims that there are many other successful investors like himself in his appendix to the 2003 revised edition of _The Intelligent Investor_. He gives details on nine of these folks. Obviously none of them have risen to his leavel of wealth, but then someone had to be the best, right? Buffett's outlandish success may be more about his ability to run a business rather than his investing success as pointed out by Don.

-Will

william dot trice at ngc dot com

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Well, yes, that is probably true. He could not have done it without talent and knowledge, as well as hard work and study. I would be inclined to say that what is due to chance is his number one rank in being way out ahead of many other investors who are equally talented.

In other words, I doubt if Buffett possesses any unique talent, or magic, or special ability to make accurate predictions about the future not possessed by many other investors.

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My conclusion as well. But since you and I agree on this issue, perhaps I should revisit my conclusion.

-HW "Skip" Weldon Columbia, SC

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Oh, now that's harsh. :)

-Will

william dot trice at ngc dot com

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Which ten years was this? 1156% in any ten year period sounds a bit suspicious. Buffett's long-term annualized average return was approx 21%. In 10 years, that's a still-spectacular

570+% cumulative return, but still, in most periods where Buffett was doing great, the broader market did pretty well, too. In the period where Buffett made 21% long-term, the S&P500 did 10+% annualized, which, over a 10-year period, is about 160% return (so same investment in BRK vs SP500 in a 10 year period, one expects some 4+x as much money at the end from BRK - if one expects the future to behave just like the past. Don't. Buffett doesn't. Read his own notes about this.)

The market can stay "undervalued" a long time. There's an old trader's saw that the market can stay irrational longer than you can stay liquid. (That's a real danger for anyone who's leveraged up on it).

The market may be undervalued. The question is _when_ will it cease to be.

Financial planning is not just about staying in the stock market, but making sure that one can safely ride out the periods where it's not behaving as one hopes it does in the longer term.

There are plenty of other Buffetts, just that they are not nearly as famous.

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On Jun 21, 12:28 pm, "Gil Faver" as part of the whole Estate Tax fiasco.  No wonder he opines against its

Can you explain this connection?

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Excellent question.

Buffet studied directly under Benjamin Graham, which gave him close insights - he did the course, with hands on interneship. He started a fund, and the role of other's money may have had something to do with it. My belief is that he loves what he does, and works harder at it than most are willing to. The last is probably the most significant.

There are always people with unusual talent in pretty much any field. The Bechtels haven't done so badly. A distinguishing feature I like in Buffett is that as far as I know, he didn't resort to underhanded business practices, as Rockefeller is reputed to have done.

Buffet did have two disadvantages that don't affect the hundreds or even thousands of other successful investors. He was subject to scrutiny, as fund manager. And, small guys don't have to worry about moving the price of a stock when they buy their full position!:-)

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"Monitor" wrote

book _The Making of an American Capitalist_ . I do not like that it focuses on a mere ten-year period that seems to be hand-picked. The ten-year period seems to have occurred in the 1960s, per a quotation here,

which states Buffett beat the Dow by 21.8% a year for 13 years. Numerous sites state that Buffett and his partners scored a coup c. 1964 when the partnership put 40% of its stock in the troubled American Express Company (AXP) (after it had tanked by 50% on "bad news") for $35 a share. By 1967, AXP had risen to $180. Does this explain much of his success in the aforementioned 10-year period? If so, uh, foul!

About mid-2007, Buffett bought around $450 million of BAC. In August, his BH stock portfolio (40 stocks or so) was worth about $61 billion, so his BAC position was less than

1%. By my reckoning, his BAC stock is now worth about half as much at $243 million.

I guess with hindsight, how much exposure various banks had to subprime mortgages was not available to investors. Did the Oracle of Omaha himself get fooled? It's only been several months, but, unlike AXP in the 1960s, it's not like BAC had tanked when Buffett bought it. In fact, BAC was at or near a historical high. Then the writedowns (surprise!) began.

I think this focus on ten years in the 1960s exaggerates Buffett's success. He's good, and I celebrate his approach in general, but I don't know that he's a wizard whose every move should be followed. I'd like more figures on his stock investing performance. (I bear in mind that his company also buys companies not publicly owned--that are not stocks--that seem a value. I am not interested in this, since it's not something this group contemplates for most posters here.)

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Nice research here. But why the foul?

-Will

william dot trice at ngc dot com

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Or wealthy.

Elizabeth Richardson

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I definitely agree, nice piece of research Elle did there.

Not his foul, IMO, but a foul for the people who tab the stats for BRKSY. Not to disparage Buffett, but the public noise over the fund's performance - *without explaining AXP and private company contributions* - may have discouraged many would-be individual investors. I can't be the only one who has felt downright stupid, can I:?

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As far as Buffett investing in BAC, I think that he has found that it is a strong bank that will probably keep paying its dividend and he had a lot of cash to park that would get better return than cd's etc.

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The article basically says that Buffett's got investments in companies which make money off of efforts to avoid/minimize the impact of estate taxes. In particular, life insurance companies.

Secondly, it claims that his business practices - in particular, the acquisition of family businesses - depends partly on families having an incentive to sell out due to estate tax issues.

The first argument is a bit of a stretch - not a huge one, but a bit of one. I think one would be hard pressed to show that a big chunk of the profits in the life insurance business comes from estate-tax-planning permanent life policies, but rather more of those profits come from term life policies that folks hold while they have dependents, and which never pay out because folks let them lapse.

The second argument is absurd, though. Folks sell off family businesses to people like Buffett not mainly because of estate taxes but rather because of control and management and succession issues. And to cash out. It's hard to sell off part of a business one owns completely. It's easy to sell the whole business to someone like Buffett in exchange for BRK stock which can then easily be sold off a little at a time and which also helps get professional management in place to keep the business running - especially important if one doesn't have, say, kids who are likely to run the business well.

None of this, however, ties into Buffett's interest in buying business at substantial discounts to intrinsic value. He's said he believes the estate tax is a good thing and while I generally disagree (it seems to make more work for accountants and lawyers than it raises useful tax revenues), but I am willing to take Buffett at his word regarding this.

Norquist's attempt to paint Buffett's support for Estate taxes as part of Buffett's self-interest-driven investment planning is, at best, just political posturing.

Norquist can make better arguments against the Estate tax without taking these potshots at Buffett. And Buffett's investment strategies work just fine whether that tax is in place or not.

There is one interesting piece which ties into all of this which has not been mentioned, though - a stock which simply accumulates capital value and pays no dividends - under current Estate tax structures an heir who inherits that stock gets a "stepped up basis" on the value of the stock. Under the provisions of the Estate tax repeal in 2010, while the estate pays no tax on the inheritence, the heirs will ultimately pay, instead, much larger cap-gains, since they will inherit the lower cost basis of the original purchaser.

Under existing rules, the Estate tax exemption allows some cap-gains to never be taxed (ie. any estate which falls below the exemption, heirs get stepped up basis, but no taxes are paid on the estate). Under Repeal, much smaller estates may be hit when heirs sell appreciated properties (though there is a provision for executors to allowate "increased basis" of $1.3 million to assets in the estate and up to $3million to assets transferred to surviving spouses) - those provisions may not be as generous in many instances as existing step-up basis provisions.

As far as these basis issues affecting Buffett, well, the truth is that it'll only substantially affect the very wealthy heirs of folks who bought BRK a long time ago. But, again, that's not very specific to Buffett or his stock-picking and investment strategies.

"Will Trice" wrote Ever in search of brevity, snip

To me the OP's article suggested that Buffett was a sage as a stock picker. But if much of his success in this single ten-year period was due mostly to a single, very good stock selection, then to me, this does not define a sage. I think Buffett is still good with his stock and non-publicly traded company investments, as evidenced by, for one, the last ten years per

. BH stock beat the S&P by about 6% on average per annum from 1997 to 2006. But I hesitate to infer this denotes wizard-like stock picking, though, since the BH company does not buy solely stocks. On the third hand, the guy does not exactly tout himself as a wizard. In the letter linked above, Buffett writes with great humility about the mistake he and one of his partners made when they bought Blue Chip Stamps decades ago. On the fourth hand, freely describing mistakes one has made is the sign of someone who is honest, learns from the mistakes, etc. This might put him back in the oracle category in many people's eyes. It improves his credibility, and so forth, to me.

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