In spite of his latest endorsement of Hillary Clinton (we all have lapses in judgment from time to time), I really like Warren Buffett's methodology of "waiting for the perfect pitch". This means that a patient investor can make a lot of money if investors simply patiently wait for the right opportunity.
Unfortunately, too many investors want instant gratification. Since none of us are graded on monthly performance (like fund managers), often its better when investors don't overpay in an overheated market.
The problem of course is recognizing you are in an overheated market. As is the case today, the financial channels are jammed with people telling you that the market is still undervalued. They did it in 2000, and they're still doing it today.
The fact of the matter is the market is extended and rich based on these trends;
- Corporate profits are decelerating.
- Emerging markets are overheated.
- The Hedge Fund and Private Equity mania is at a peak.
- The Housing market continues to unwind.
- Insider buying in big blue chip companies are non-existent.
- Energy prices are at all-time highs.
- Inflation remains out of control, and the CPI and PPI numbers are no longer an accurate indicator.
- American's are fed up with the current government and will make additional changes in the 2008 elections. With this shift of power will come changes in the current tax structure.
- Foreign Central Banks are selling U.S. fixed income in search of a more stable currency. As a result, long term interest rates are heading higher.
- Finally, we will find that the fallout from the Bear Stearns CDO debacle is not an isolated case, and there are more hedge funds involved than previously thought.
Here are a few lessons from Buffett that could save us a lot of pain, and potentially make us a lot of money.
Waiting for the Perfect pitch
1) "We're not going to buy anything just to buy it. We will only buy something if we think we're getting something attractive ... You don't get paid for activity. You get paid for being right."
2) "In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size of a baseball. Swinging only at balls in his 'best' cell, he knew, would allow him to bat .400; reaching for balls in his 'worst' spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors."
3) "The stock market is a no-called-strike game. You don't have to swing at everything -- you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'"
4) "Simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
5) If you wait for the perfect pitch--and then you hit it out of the park.
Here is a story that you'll enjoy. It's a story about an older gentleman who was a client of mine several years ago. He never wanted to have anything to do with the stock market, and then one day...
In 1992, I began having serious doubts about the advice Wall Street firms gave to their brokers, and subsequently, to their clients. In September of that year, IBM was trading at $82 per share. A “strong buy” was given to the stock by the analyst at A.G. Edwards, the company for which I worked. From September of ’92 to September of ’93, the stock fell from $82 to $42.
As IBM reached the bottom, the analyst covering the stock issued a sell recommendation, claiming IBM was done for. I had serious doubts about this recommendation, but the brokers in the office were clamoring about the demise of “Big Blue”.
Shortly after the sell recommendation was issued, IBM began to climb. One of my retired clients, who had never previously bought a stock from me (he was very conservative), called and wanted to buy IBM. After telling him what the analyst’s opinion was on IBM, he said he didn’t care what the analyst had to say, and bought the stock.
By the end of 1993, IBM was trading at $56.50, 14-1/2 points higher than the September ’93 low of $42. In December of ’94, IBM was at $73.50, and December of ’96, the stock was at $155.13. Need I say more? To add insult to injury, had the investor hung on to IBM through May of ’99, he would have received two 2 for 1 splits. If the investor had sold at the analyst’s recommendation, he would have received $4,200 on 100 shares. In 2002, despite a horrible market downturn, those same 100 shares would now be 400 shares worth $30,944.
Here endth the lesson.
