Value Investors: Stay Strong, and Follow Warren Buffett

No one said being a value investor was going to be easy. In fact, I've heard several different value investors make comments about how difficult it is and how much discipline it requires to be a value investor. For example, in this Morningstar article, Larry Sarbit is quoted as recently saying that he is only 57 years old but feels like 87. That doesn't sound like a positive declaration for how easy it is to be a value investor. Obviously these market conditions are taking a toll on even the most seasoned of value investors.

Last year, while attending Prof. George Athanassakos' value investor speaker series at the Richard Ivey School of Business, I had the privilege to listen to the wisdom of Bob Tattersal, a very experienced and successful value investor. I was excited to learn that Bob was actually going to reveal his technique for finding "deep value" in securities. Then Bob said something which revealed his tremendous insight of human behaviour. Bob said, "I don't mind showing you these techniques because quite frankly, most if not all of you are not going to be able to follow my advice". Wow, that really hit me!

Bob knew that many people would go to other careers and would not have the time to diligently apply his methods if it wasn't their main job. He also knew that many others would obtain jobs in companies that would not have a value mandate. For those of us who would go on to work in a value shop, Bob also realized that many of those firms might eventually cave to client pressures when times got rough and eventually veer away from value investing. Even of the remaining few students that were deeply devoted to value investing and willing and able to follow its principles, he knew that even those people would likely not have the internal fortitude and discipline to stay the course. Basically, Bob knew that there were not many people in that classroom that would be able to stick it out as value investors and apply his methods.

Is it easy being a value investor? I think not. It's especially difficult to be a true value investor in a rapidly declining market like the one we are currently experiencing. In this kind of a market, value investors and their clients, have to be prepared to look silly in the short term. Buffett has said that in the short term, he has no idea what the stock markets will do, but in the long term, a company's share price will track remarkably well to the underlying economics of a business.

Warren Buffett also recognizes the difficulty in acquiring the requisite discipline to be a value investor. While Buffett was working for Graham, he learned the hard way the value of being selective and disciplined. In the book The Warren Buffet Way, Buffett is quoted as saying he became frustrated when Graham shot down idea after idea that Warren presented to him. However, Warren acknowledges that he benefited tremendously from acquired the discipline to buy only the best ideas. Buffett commented that Graham would only buy when he had all the factors working in his favor. That was an important lesson for Buffett to learn.

What does the most successful investor of all time advise us to do today? Warren Buffett advises us to invest in equities. He counsels that we can't just invest when we feel comfortable doing so and still hope to be successful investors. In this article, released last month, Buffett reveals that he feels now is the time to be buying equities.

As value investors we have to capitalize on the opportunities that Mr. Market offers us and often that means doing something different than the crowd is doing.

Leveraging Buffett

I am sure most of you would agree that the stock market behaviour has been anything but rational during recent times. We have witnessed market values for out of favour companies erode with seemingly vicious speed. Many people may be feeling helpless with the declining values that the markets have imparted on their investments. What can we do?

Buffett feels the time is right to start investing. One question you may be asking is how can we make Buffett-like investments? I believe one of the best solutions to that question is to consider investing in the Berkshire Hathaway class A shares (BRK.A) or the more affordable class B shares (BRK.B). There are several reasons why you may want to invest in Berkshire Hathaway shares at this time.

The first reason is that Buffett is a very disciplined and patient investor who knows how to invest wisely in fearful markets. He has a long-term investment performance track record that is widely recognized as the being the best ever. Who would be a better choice to invest your money in these markets?

Second, Buffett can get access to deals that the average investor cannot participate in. In the Warren Buffett way, we have written about special convertible preferred shares that Warren has been able to invest in over the years, primarily because of his reputation as a wise and patient investor with deep pockets. In these markets, there are many companies that desperately require patient capital, and we have already observed special Berkshire-only deals made with General Electric (GE) and Goldman Sachs (GS).

Third, by buying shares in Berkshire Hathaway, you get to own interests in some of the finest, cash-generating companies on the planet. Buffett, together with Munger, have purchased incredibly profitable companies over the years that have met their strict standards for quality. In fact, many of these companies are now owned outright by Berkshire Hathaway. So when you buy Berkshire Hathaway today, your investment is comprised of the same diversified companies that Berkshire owns.

My last point is that Berkshire Hathaway may be currently trading at a good price for investors. First, the share price of Berkshire Hathaway class B shares, has fallen from a 52-week high of $5,059/sh to a current price of $2,914/sh. Also the fact that Buffett is now bullish on buying equities is a strong endorsement that share prices in general have fallen below what he considers to be rational. Also, Barron's published an interesting article here, which supports the notion that Berkshire Hathaway may be available at historically cheap prices in today's market.

Disclosure: The author is a shareholder of Berkshire Hathaway.

Comments

[raytayzmd:]

...the problem lies in trying to assess value...BRK now has a potential 37 billion dollar bomb sitting on its balance sheet IF the market doesn't recover in ten years...37 billion?...ten years?....how does one assess the "value" of that?...anymore so many companies have such complicated structures -- e.g. GE -- that who can assess them...buying Marmon and paying a buck for a buck of revenues from a construction/industria... conglomerate heading into a recession was good "value"?...maybe times have changed and Buffett is out of his element.

2008 Nov 24 11:05 AM

[The World's...:]

this article is pointless. A Buffett love fest.

2008 Nov 24 12:50 PM

[Muzie:]

"BRK now has a potential 37 billion dollar bomb sitting on its balance sheet IF the market doesn't recover in ten years...37 billion?...ten years?...."

Duh.

1) "37 Billion" is if the entire stock market goes to zero. You're being facetious here. If you think that's going to happen, then maybe you should just move on and not follow the stock market. It won't exist.
2) The puts are not in ten years. SEC documents say fifteen to twenty years.
3) BRK has cashed in 5B$ of premiums from the puts. The loss must exceed that amount before being a true loss.
4) Calculate the value of this "potential" 30B$ loss twenty years from now when accounting for inflation. Calculate that the 5B$ premium that is now is now in Buffet's hands can be put into Treasuries or CDs or invested and yield a non-negative return, mitigating any "loss". Finally establish how significant this 30B$ loss would be in a Berkshire's cash flow twenty years in the future.

"how does one assess the "value" of that?..."

There are ways and I've shown you some. That questions suggests to me it is you, not Buffet, who is out of his element here.

2008 Nov 24 06:26 PM

[Bud Labitan:]

Ever wonder about the investing and probability sensibilities of Buffett and Munger? My new book is really about “decision framing.” “The Four Filters Invention of Warren Buffett and Charlie Munger” ( www.amazon.com/dp/0615... ) examines each of the basic steps they perform in “framing and making” an investment decision. This book is a focused look into this amazing invention within “Behavioral Finance” that has been underappreciated by both the business and academic communities. The genius of Buffett and Munger’s four filters process was to “capture all the important stakeholders” in a “multi-variable” equation or formula. Imagine…Products, Enduring Customers, Managers, and Margin-of-Safety… all in one mixed “qual + quant” formula. In rolling two die for double-sixes, the gambler's odds are 1/36 and the house odds are 35/36 or 97%. When Buffett and Munger make a bet, they do so with house odds.
www.youtube.com/v/isB6...

2008 Nov 24 10:52 PM

[Old Rick:]

I've seen RayTay's anti-Buffett posts on several other articles. I would like to see him give an assessment of how "times have changed.." I recall the Buffett bashers making the same assertions in 1998-2000. Having been through the 1973-1974 market, this one has a very similar feel. In 73-74 (mostly late '74) Buffett was buying with both hands and it seemed to turn out OK for him. As far as who can assess the complex structure of GE, I'd put my $$$ on Buffett. If we check back in 5 years, his GS and GE preferred and warrants will likely be very profitable. On his index put sales, they are no more than a simple insurance policy where Buffett made a "high probability" bet getting a big premium that is Buffett/Munger/Jain/Si... float for the next 11-20 years.

2008 Nov 25 10:05 AM