Invest the Warren Buffett way: Part 2

“There seems to be some perverse human characteristic that likes to make easy things difficult… There will continue to be wide discrepancies between price and value in the marketplace and those who read their Graham & Dodd will continue to prosper.”

Yes, it is that simple folks, as Mr Buffett said in his 1984 ‘essay’ to Columbia University, successful investing certainly doesn’t require a stratospheric IQ or intelligent insights. While I can certainly understand why many (especially younger 20- and 30-somethings) prospective investors have given up on sharemarket investing from the malaise of the so called GFC last year and thrown it all into the ‘too hard basket’ and instead turned their sights to focusing on something they believe will NOT go down in price, something more within their ‘perceived’ circle of competence, property investment… Give up! In a word DONT! Need a timely reminder? The core of the GFC cause: property slump caused by excessive personal credit and liquidity.

“When everybody is doing the same thing, nobody’s doing much at all.” Hmm, that one sounds familiar, and what about the old fabled, “It’s that popular nobody goes there any more” are commonly used phrases that come to mind.

On the other hand the commercial property market suffered some spectacular and fantastic falls to provide a great starting point for entry. Cigarette package warning: Pay healthy attention to DEBT, leverage and the quality of management. (Smoking hasn’t really been much help with my investment decisions… No I don’t smoke, thanks for asking).

Disaster proof your life

The Graham-Dodd price versus value and the adapted to modern investing, Warren Buffett way is a handy guide not just for sharemarket investing but in everyday applications. From obtaining an ‘intrinsic’ business valuation for that all-important merger and business acquisition with an acceptable margin of safety to a warts and all cost versus benefits when obtaining life/trauma/income protection/total and permanent disablement cover policies. Plain speak: what value am I getting for my money? Maybe it would have come in as a handy guide for some who participated in a certain large retail float recently.

To your all important estate matters, those cheap will kits offered at newsagencies are of little value if you have any more than $50,000 in assets and most will not allow asset protection strategies or hold up in court if challenged. To your superannuation policy, focus solely on costs of the service or returns and you are doing yourself a disservice. If you are in a retail fund and use the service of a smart financial adviser providing quality advice even the most basic advice will increase the intrinsic value of your final balance in the long run. Gold, well, while a bit of head scratcher to value, (or for that matter call it an investment at all, because it doesn’t produce an income) looking at the long-term return (price) ie. 36 years or more and doesn’t it look just a tad pricey?

The easy money is gone

If you missed the run from early March, the easy money has gone. History shows us that from a very serious decline more often than not there is easy money to be made from the bottom when the bad news stops getting churned out. This theme is likely to continue into the future and this time was no different. If you’re looking at the ‘market’ return you are only looking at ‘price,’.

If so you’re heading for long-term investment headache and disaster. For most companies ‘value’ has yet to catch up, that is why I described the latest run as a flight to the death in my first blog. Although everything looks pricey the bad news would have to come back in droves to send the market back in the doldrums again and in time value will catch up.

My prescription, with an uncertain future investment landscape, it’s best to come to grips with these basic themes to ward off serious long-term financial brain damage.

For further reading see here and here.

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.