Feb 18, 2020
Have you heard the saying: sticks and stones may break my bones but words will never hurt me? That person obviously never listened to bad advice. I have just read an article that was sent to me by one of my readers and it has made me livid. This article, which I will link below, is exactly the type of unsupported misinformation that can bring devastating consequence to new investors.
What has my blood boiling is that the article is full of wildly ill-informed statements the biggest of which is "for decades, Warren Buffett has been the king of investing. But the strategy that made him the third-richest man on the planet is dead."
Now I know what you are thinking, I am mindlessly jumping to the defence of my hero, the Oracle of Omaha, I will admit that if I ever actually met Warren, I would most likely go all fan girl, which would make for a great meme I am sure😉. However, this is not the case. I pride myself on being very current with the times, being able to look at all new information and being able to pivot my investing strategy. As such, I look at all possible aspects.
I can see what the author of this article, Ben Brown, is saying in regards to the benefits of growth investing and the amazing results of some of the leading companies on the planet, such as Tesla and Amazon. However, adopting a narrow view of using one strategy over another is foolish.
Let me first explain the difference between value investing and growth investing. From Investopedia.com:
Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively ferret out stocks they think the stock market is underestimating.
Growth investing is an investment style and strategy that is focused on increasing an investor's capital. Growth investors typically invest in growth stocks—that is, young or small companies whose earnings are expected to increase at an above-average rate compared to their industry sector or the overall market.
The basis of Ben's article is that value investing is dead and growth investing is the last man standing. As you can see they are two very different styles, but they’re still logically connected. For value investing, you want to find a business or stock that is trading or currently valued less than its intrinsic value (that was my word of the day 😉). Basically, a business that is worth less on the stock market today than its total sum of assets and income indicate it is worth. This can be for a variety of reasons, such as fleeting bad press or a downturn in the current demand for a product that is driven by short-term circumstance. So what you’re looking to do is "buy well," which is generally where the profits are made, as most professional investors know. Growth investing is the second fundamental of making an investment purchase. You can achieve this by either purchasing undervalued stock or by purchasing into a company that is expected to grow significantly.
If you only focus on a growth strategy for new and emerging companies, the issue you are going to have is no-one has a crystal ball. Ben has made statements that Warren’s method is dead and his strategy is outdated, and has called him out on missing the boat with major companies like Tesla and Amazon. Yes, Warren did not purchase into these companies that have experienced fairly steady climbs in value without any significant dips, but Ben fails to mention how many other companies Warren also did not purchase that started out in those emerging industries and did not make it. How would Warren have been able to make an educated decision on which companies to back? We are not talking about an armchair investor. If Warren had made a purchase in all these companies, it would not have been a couple of hundred dollars in each to see how they went; they would have been significant investments.
As you can probably already see, both of these strategies work together and I think Ben is missing the fundamental principal of investing, patience. It is a foolish strategy to run out and start buying shares in all of the companies that are doing well today. Firstly, you are paying a premium and secondly, what if that is the best they are ever going to do? Now I am not saying this type of strategy has no place in the investing world. Without the people who make these decisions, we cannot get rich. Haha. The markets are full of people buying high and selling low. What I do not want to see are any of my readers or clients making silly decisions like this. We are in the business of making money, after all.
I did have a chuckle at this statement: "Problem is, when you live by a value investing dogma, everything looks overvalued… No wonder he’s on the sidelines with a record $130 billion in cash."
Firstly, recessions are as certain as death and taxes. The entire history of the world since the introduction of money is a testament to that. Read one of my older articles (https://www.raic.com.au/post/diamond-tiaras) for a breakdown of the likelihood of recessions in our modern era.
If you look at Warrens history of trading you will see that, Berkshire Hathaway, (Warrens company) is clearly positioning itself for possibly one of the largest buying frenzies the world has ever seen since Marcus Licinius Crassus (112 BC – 53 BC). If you want to see some real wealth, read up about him here: https://en.wikipedia.org/wiki/Marcus_Licinius_Crassus. He may have been the very first trillionaire if you accounted for his wealth in today’s dollars.
The real statement from Ben’s article that has me up in arms: "Many have suggested this means there’s a huge stock market crash around the corner. But what if there isn’t? What if this is a new era of investing – one that values growth potential, innovation, and star-power over fundamentals."
But what if there isn’t?!!! Seriously ... WTF? How is that a sound basis for an investing strategy? Based on all the historical economic data we have to date, not only is a recession inevitable at some point, just about every possible indicator is pointing to it being in the near future.
When you have the Bank for International Settlements(BIS)- issuing a paper (https://www.bis.org/publ/othp31.pdf) talking about a "green swan" (for context, the Global Financial Crisis in banking circles has been nicknamed the black swan) you know with certainty that there is some instability in the market. The green swan is a potential financial crisis arising from climate change, where central banks are being urged to purchase coal mines to keep them operational to shore up financial stability. This is the type of data that investment firms like Berkshire Hathaway take into consideration when building a war chest, like the $130 billion of funds they have right now.
I will make a prediction right now. I am putting very good odds on our old friend, the Oracle of Omaha, purchasing large amounts of shares in companies like Amazon and Tesla once we do have the inevitable recession or downturn. – when those companies will be undervalued because emotion in the marketplace is stopping people from spending money on new talking devices and self-driving cars, when they are worried that tomorrow they may not have a job. At that point, those companies will have a significant decline in market value, not because they are not strong companies, but because they are reliant on market sentiment. Those are the types of companies that will survive a recession.
In this man’s opinion, use all of the strategies, use them together and always be diversified. But the most important investment tool is patience. Only fools rush in.
Thank you for reading, friends, and please feel free to send me any thoughts or articles you might like me to write about.
Have a lovely day.
#investment #valueinvesting #growthinvesting