Price on Value
March, 2000
Investor of the
Century—Warren or ... ?
John Price, Ph.D.
Who was the investor of the
century? To find out, the Carson group surveyed investment professionals
around the country. Based on 300 replies, the popular choice was Warren
Buffett followed closely by Peter Lynch. Next came John Templeton of the
Templeton Group. Benjamin Graham and David Dodd, the founders of value
investing, and hedge fund guru George Soros made up the top five.
Buffett’s
methods are deceptively simple. Buy and hold (forever, if possible)
companies with an economic moat that are selling for less than their
intrinsic value. This Buffett explains is the present value of the cash
that can be taken out of the company over its remaining life.
The
hard part is to forecast the cash-generating potential, one reason why
Buffett shuns technology: It’s too hard to forecast. “I focus on
absence of change,” says Buffett, explaining why he prefers Wrigley’s,
say, to Microsoft. “I don’t think the Internet is going to change how
people chew gum.”
Stockholders
in Berkshire Hathaway, the company managed by Buffett, have recently paid
a price for his avoidance of technology: Currently the stock is at a
two-year low. This hurts when it is compared to its earlier record. For
example, up to mid 1998 the average annual return for Berkshire Hathaway
has been an outstanding 35 percent for the previous 20 years. Wow! And a
double wow! when you compare it with the return of the S&P500 index
over the same period. Just 12.9 percent.
Not
that there is anything wrong with 12 or 13 percent over 20 years. (More
about this later.) It is just that it is not in the same league as 35
percent.
It hurts even more when you
compare it with indices that have more high tech and internet stocks in
them. For example, the NASDAQ index started 1999 at 1854.39 and ended at
3707.82, a gain of 99.7 percent.
Is Berkshire going to come back?
I certainly believe so. Call me old fashioned. But in the end aren’t we
buying a stock because we believe that it is going to generate a
profitable stream of cash in the future? And I think that Berkshire has
investments that will do just this.
A lot of the market gain is on
the back of some rather strange statistics. Consider Amazon.com, one of
the stocks that has been a shining star up until the end of 1998. I love
shopping at Amazon. Great site. Easy to use. Even more. Through the
generosity of the company (and stockholders) they are willing to subsidize
my purchases.
During 1999, Amazon lost over a
million dollars per day, more than $2 per share. Put it another way. Over
the year, Amazon gained 11 million new customers so each new customer
cost the company over $100.
Anyway, that is enough of the
mysteries of current prices of some stocks. I want to end the article by
talking about other investors who I think should receive awards. In fact,
there is a whole family of them but I shall only mention three: Donald,
Sally and Nancy. They are Donald Dow Jones, Sally S&P 500, and Nancy
NASDAQ.
Over the past ten years they
have averaged 15.1 percent, 15.5 percent, and 26 percent per year. Putting
aside the NASDAQ for the moment, averaging 15 percent for ten years means
your money has quadrupled over this time. Investing $10,000 per year at
this rate gives you a healthy $233, 492 at the end of ten years.
The most important thing with
index investing is to keep doing it regularly. Even investing at the worst
time of the year or the best time of the year makes little difference in
the long run. This was clear from the figures in my article “To Invest
or not to Invest: That is NOT the Question”.
Click here for details.
There are now many mutual funds
that you can invest in which track each of the major indices. Also, if you
prefer more socially responsible companies, you can invest in a fund that
tracks the Domini 400 Social Index. This index is similar to S&P500
consisting of 400 stocks that pass social, environmental and ethical
criteria.
Another statistic that is worth
pondering is that major indices outperform around three quarters of all
funds. So, if you are just getting started, putting a slab of your funds
with Donald, Sally, Nancy, or any of their extended family in an index
fund makes a lot of sense. The same applies if you do not have the time or
the inclination to study the market.
As Buffett said in the 1993
annual report of Berkshire Hathaway, “By periodically investing in an
index fund, the know-nothing investor can actually out-perform most
investment professionals.” And if you want to move to being a
know-something investor, keep in mind the words of Josh Billings, “It is
better to know nothing than to know what ain’t so.”
_______________________________________
Valuesoft has been designed to
help you become a know-something investor rather than a know-nothing
investor. Click here for
more information. Next month’s article “The Five-Percent Principle” will examine an
idea which I think could have a big impact on more than just your investing. |
