For those of you haven’t heard, Mr Warren E Buffett is one very decent old chap from downtown Omaha Nebraska, Midwest USA. Mr Buffett, as chief investor at Berkshire Hathaway, is likely to go down as the greatest long-term investor with an unequalled and stellar 50-plus year’s performance with annual returns in the 20-30% range. He is also a certified master at drawing analogies and for the many that have made the effort to do so, it has paid handsomely to seriously listen to his often comical one-liners about investing and business. His most famous from the land of the ‘Oracle of Omaha’: “be fearful when others are greedy and greedy when others are fearful.”
Well Mr B, what should I be now? Fearful or greedy?
The broader sharemarket is up some 54% from our early March low, but we are still 30% off our high back in November 2007. Should I be greedy because it is still down some 30% from the frothy heights of November 2007? Or fearful because it has come back so darn quickly since its low on March 9 and are things starting to look expensive relative to earnings? Greedy because the ‘great recession’ wasn’t so ‘great’ or fearful because the deleveraging doc hasn’t cleared us back to “full financial health” and we are “not out of the woods yet”? (Much face scrunching and grimacing with pain at cliché overuse).
Should I be greedy because the price of gold has never been higher and the dollar is likely to keep rising? Or fearful because the earnings of many listed companies are not real but manufactured ‘fairy’ dust accounting or fearful for others, backed by funding guarantees that will be removed shortly?
Are you confused? I certainly am.
Okay, let’s rewind the tape.
Yes, okay, I know, you’re telling me something I do already know. Residential property has to this point beaten shares on a time in the market basis over the last 10 years. But we are reminded by many of our leading professors of business and finance that shares are still the leading way to grow your assets faster over the longer term and again that looks set to remain the case for the future. For certain time periods there are other asset classes that may outperform but picking those times out is difficult at best.
While many would feel they have missed their chance of their share of the 50%+ recent rally, much of this has been a ‘flood to the near dead’ with the other more quality shares deemed guilty by association, and unfortunately, around those March lows, we are not hardwired to go in when everyone is ‘heading out the door.’
Fundamentals please.
It’s easy to just say ‘stick to issues of high quality’ that would infer you go out and only buy “blue-chip” stocks. Right? Wrong. It’s better to ask yourself “well should I have some hard and fast rules on company valuation?” There are many brand name shares such as RIO TINTO (ASX: RIO) asking close to 75 times earnings when at the height of the crisis ‘Mr Market’ might have led you to believe it was a much more reasonable investment at around 3.3 times nearer at its 52 week low.
It could well be argued that certain past stalwarts would now look decidedly expensive. It could be time to check your portfolio and move to companies with an all important sound economic moat, strong catalyst for growth and balance sheet flexibility to take advantage of weak spots in competitors and include that all important concept of ‘margin of safety’. Better train yourself to understand not only what the ‘price’ is of something but what it is relative to its ‘value.’ I would argue this is the greatest problem the common garden-variety investor makes even so called professionals make it time and time again.
Should I be fearful or greedy, well if you’re already doing the above, keep doing what works for you and don’t try to ride the trend of the day. Always be both fearful (of price breaking out of value) and greedy. (Have the flexibility in your portfolio to take advantage of short-term corrections of quality issues).
More on the concept of ‘margin of safety’ and an extra large helping of Mr Buffett’s well-worn phrases and philosophy next time.
Nick Christian is a Financial Adviser and planner and authorised representative of Millennium3 Financial Services.
The views and opinions expressed within this letter are those of the author and do not necessarily reflect those of Millennium3 Financial Services Pty Ltd.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
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