Stock Valuation and More From Warren Buffett, Continued
Warren Buffet and stock valuation are like bread and butter. Buffet's known as the value investor. If you know his story, he studied with Benjamin Graham, who became his mentor. Graham taught at Columbia University, ran an investment management firm, and wrote several books on value investing.
We've been discussing stock valuation along with some other Buffet ideas. We'll continue with:
Well, you should read the book to get the full picture. But one suggestion Buffet makes is that you limit yourself to stocks selling at a price not far above their tangible-asset value. This is fairly simple, even "outmoded" in this age of sophisticated investment ideas and techniques. But simple ideas are usually best. So we'll go with Buffet's simple idea here.
Now, if you know anything about investing, you know that one way people break down investing in stocks is to talk about "value" stocks vs. "growth" stocks. And there are certainly many examples of people who have invested successfully in so-called growth stocks. But Buffet's not one of these people. He sticks to value.
In fact, his comment about growth investing in the introduction to The Intelligent Investor is, "while there are many good growth companies worth several times net assets, the buyer of such hares will be too dependent on the vagaries and fluctuations of the stock market."
So Buffet's saying that a real investor pays more attention to the value of the stock he's buying rather than what's going on in the stock market. He's trying to remind us not to get pulled this way and that by the typical gyrations the stock market experiences over time.
On a practical level, you can appreciate this advice in times when the market is really volatile - like now. Too many people pay too much attention to the day-to-day activity of the stock market. Every day they watch it go up or down. And too many people listen to the inane comments by the so-called experts that appear on MSNBC, Bloomberg, and other places.
I think Buffet would admit that someone with knowledge and experience can make money investing in "growth" stocks. But he's wise enough to know that it's probably better for most people - if they're doing their own investing - to start with and stick to values.
This whole issue of the daily financial commentary that so many people listen to is important. In my office, we share a common space with other professionals where you can get coffee and snacks. There's a TV there, and sometimes I see someone staring at MSNBC while various talking heads prattle on about "what's happening" today in the market. I wonder whether they're really taking it all in and hoping they're smart enough not to really pay it any mind. It really is financial junk.
Now, this doesn't mean you shouldn't pay attention to what's going on in the markets. I do. It's just that I really don't listen to the daily "analysis" people come up with. Along these lines, a typical comment would be something like, "the market went down today on news that housing starts were weaker than anticipated" - or some other such nonsense. While it's possible that some daily data riled up traders, for the most part smart investors don't throw serious money at stocks, or sell out their positions because of something they heard on MSNBC today. Really, they don't.
Anyway, we'll continue with Buffet's final two points in the next post:
We've been discussing stock valuation along with some other Buffet ideas. We'll continue with:
- Value, value, value.
- Don't get suckered in by big growth stories.
Well, you should read the book to get the full picture. But one suggestion Buffet makes is that you limit yourself to stocks selling at a price not far above their tangible-asset value. This is fairly simple, even "outmoded" in this age of sophisticated investment ideas and techniques. But simple ideas are usually best. So we'll go with Buffet's simple idea here.
Now, if you know anything about investing, you know that one way people break down investing in stocks is to talk about "value" stocks vs. "growth" stocks. And there are certainly many examples of people who have invested successfully in so-called growth stocks. But Buffet's not one of these people. He sticks to value.
In fact, his comment about growth investing in the introduction to The Intelligent Investor is, "while there are many good growth companies worth several times net assets, the buyer of such hares will be too dependent on the vagaries and fluctuations of the stock market."
So Buffet's saying that a real investor pays more attention to the value of the stock he's buying rather than what's going on in the stock market. He's trying to remind us not to get pulled this way and that by the typical gyrations the stock market experiences over time.
On a practical level, you can appreciate this advice in times when the market is really volatile - like now. Too many people pay too much attention to the day-to-day activity of the stock market. Every day they watch it go up or down. And too many people listen to the inane comments by the so-called experts that appear on MSNBC, Bloomberg, and other places.
I think Buffet would admit that someone with knowledge and experience can make money investing in "growth" stocks. But he's wise enough to know that it's probably better for most people - if they're doing their own investing - to start with and stick to values.
This whole issue of the daily financial commentary that so many people listen to is important. In my office, we share a common space with other professionals where you can get coffee and snacks. There's a TV there, and sometimes I see someone staring at MSNBC while various talking heads prattle on about "what's happening" today in the market. I wonder whether they're really taking it all in and hoping they're smart enough not to really pay it any mind. It really is financial junk.
Now, this doesn't mean you shouldn't pay attention to what's going on in the markets. I do. It's just that I really don't listen to the daily "analysis" people come up with. Along these lines, a typical comment would be something like, "the market went down today on news that housing starts were weaker than anticipated" - or some other such nonsense. While it's possible that some daily data riled up traders, for the most part smart investors don't throw serious money at stocks, or sell out their positions because of something they heard on MSNBC today. Really, they don't.
Anyway, we'll continue with Buffet's final two points in the next post:
- Understand what you own.
- Defense beats offense.
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