The Trouble With Warren Buffett's Methods

**lzhang** Thu Jan 04, 2007 2:48 pm

The Trouble With Warren Buffett's Methods
An interesting article @ http://valuestockplus.blogspot.com/2007/01/trouble-with-warren-buffetts-methods.html , which might be from Tezimandee forum

But I want to point out that if one just notice the difficulties to apply those value investment, but can not find ways to do it, he'd better not invest. Particularly one thing it has is quite wrong, `You should no more think you might emulate Warren Buffett after reading a few books than you should believe that by studying physics for a few months in your spare time, you might emulate Albert Einstein or Isaac Newton.' It is not the same as being Buffett or being Einstein. You do not need to create anything to be Buffett, you do not need high IQ, but you do need to create a new theory to be Einstein.

Exactly the same as Buffett said about a good business, value investment is simple, but not easy.

**blast_investor** Thu Jan 04, 2007 4:57 pm

I think the overall article is good, but some key point is wrong.
When Buffett was young, information was very expensive to obtain. Only those privileged and Buffett like can access to. It used to be that insiders do not need to let small investors to know after 6 months to buy or sell. Only those privileged would know.

New law, Internet changes everything. Now, SEC report, insider trading new rule for quick filing in a few days, public conference call give small investors as much information as big guys and privileged ones.

But one thing does not change, value investing is not easy, it is as difficult as before because more information, more internet also encouraged short term behavior in the market, which is cause for poor performance in the long run.

**blast_investor** Thu Jan 04, 2007 5:07 pm

A simple illustration.

Supposed there is one key information that investors need to know quickly to win in the long run, this key information is a fundamental information that insiders do not want others to know: tons of insider buying or selling.

Decades ago, only those privileged would know this, therefore, small investors could not win due to lack of that information.

Nowadays, market does give you this information, but it also give you 99 other non-relevant information.

One important information out of 100 most useless, sometimes harmful information presenting to everyone. Most investors would act on the wrong information. But only those who truly believe in value investing and Buffett method would win. This is not easy.

**blast_investor** Thu Jan 04, 2007 5:16 pm

Human Being Incapable of making correct financial decisions in general

Last week, Wall Street Journal reported that a study showed that out of thousands mortgage refinance paying for points, only 1.4% made correct decision.

point is like prepay of interest, but lower the rate later on. Only those who hold the mortgage longer than break even years would make correct choice.

1% point, rate lowered 0.25% per year. Home buyers need to wait for 4 years (break even years) in order to benefit from lower rate.

Study showed that most people who paid point, waited less than break even years. Only 1.4% made correct move.

This piece of study just showed how wrong people's judgement can be in the long run.

The same phenomena is happening too in value stocks. Most value stocks are big winner in the long run. But most likely, most people does not like value stocks or even hate value stocks. Those value investors just have to understand that this is the case and they have to go against crowd in most of time. Don't expect others or market would appreciate or like your value picks.

The only difference is that, in the long run, value investors are rich people as group. So in the long run, you will realize that you are richer than most other folks who do not preach value investing.

So this is short term pain, but long term reward.

**lzhang** Thu Jan 04, 2007 5:23 pm

Can not agree more.

Information is more abundant, but people are acting in the same emotional way as before. I think human nature remains the same all time.

blast_investor wrote: A simple illustration.

Supposed there is one key information that investors need to know quickly to win in the long run, this key information is a fundamental information that insiders do not want others to know: tons of insider buying or selling.

Decades ago, only those privileged would know this, therefore, small investors could not win due to lack of that information.

Nowadays, market does give you this information, but it also give you 99 other non-relevant information.

One important information out of 100 most useless, sometimes harmful information presenting to everyone. Most investors would act on the wrong information. But only those who truly believe in value investing and Buffett method would win. This is not easy.

**littlebird** Fri Jan 05, 2007 3:28 pm

The problem is how to tell value trap from value investment. For exmaple, BRNC is a growth company with good value, however,if you stick to buy-and-hold strategy, you will be downed over 20%.

**blast_investor** Fri Jan 05, 2007 5:57 pm

This goes for this statement, value investing is simple, but not easy.

In stock market, if management is not honest, the smarter the management is, the more money the investors are likely to lose.

Another point is that buy-and-hold is not method of value investing. Value investing preach buy-and-hold on value only, and sell non-value quickly.

Identify value from non-value is very tough job. Many times, the answer is "do not know". This actually is a fine answer, because successful value investors only buy and sell on what they "know".

littlebird wrote: The problem is how to tell value trap from value investment. For exmaple, BRNC is a growth company with good value, however,if you stick to buy-and-hold strategy, you will be downed over 20%.

**ffreedom** Sat Jan 06, 2007 1:25 am

no value?
The sad reality is that by the time you recognize it has no value, you already lose big.
blast_investor wrote:
Another point is that buy-and-hold is not method of value investing. Value investing preach buy-and-hold on value only, and sell non-value quickly.

Identify value from non-value is very tough job. Many times, the answer is "do not know". This actually is a fine answer, because successful value investors only buy and sell on what they "know".

littlebird wrote: The problem is how to tell value trap from value investment. For exmaple, BRNC is a growth company with good value, however,if you stick to buy-and-hold strategy, you will be downed over 20%.