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Archive for December 25th, 2012

Why do Value Investors Like Indexing?

Tuesday, December 25th, 2012

In general, most value investors like indexing.  Buffett and many others agree on this.  But why?

1) Most value investors that I have known want ordinary people to have an option of doing pretty well, without investing with them, because the minimums are too high — investing in index funds fits that.  Further, Vanguard, who acts in the interest of their investors is an excellent institution.  If I could have a fund there and be paid 10-20 basis points, I would do it in a heartbeat.

2) The second reason is less noble.  We like less competition.  Index money is thought-free money with respect to company and sector selection.  The more of a company that is held by index investors, the greater the probability that it is mispriced.

Now, that is not necessarily so crass on our part.  Look, good investing for most people is like holding a second job.  Do you really want to devote that much of your life to seeking out bargains?  Not many will want to do that.  (Note: there is a side benefit to doing value investing, no matter what sort of firm you work for.  You learn to think like an intelligent businessman — most employees don’t do that.  The ability to think like a intelligent businessman sets you up for greater responsibility, because you can not only do your task, but you can consider the deeper questions of business, making you a prime candidate for a promotion.)

But… there is another venue for mispriced stocks.  Some large stocks don’t get into the index because they are foreign, or have a large amount of the stock owned by a control group, which makes them less liquid.  The main idea is that stocks that few people think about are less liquid, and more likely to be mispriced, but the question remains: are they mispriced high or low?

That is the question for the value investor, and not for those that buy stocks as commodities, as many index investors do.

Book Review: The Snowball, Epilogue

Tuesday, December 25th, 2012

After I finished last night, I realized I had a few more things to say.  First I need to correct what I wrote in part two regarding the separation of Buffett and Susie.  Here’s some help from one of my readers:

I do have a bone to pick with your review of the Snowball, part two: in describing the Buffett’s separation and arrival of Astrid Menks, you have substituted your own judgment for that of Schroeder and Buffett, without making it clear that it is your own viewpoint.  I certainly understand your assessment of the marriage and perhaps your desire to defend Buffett, as he is someone you clearly respect (as do I).  But Buffett’s own view, expressed in the book that Susie’s leaving was “99% [his] fault”.  Schroeder also indicates that Buffett was quite difficult, and of course, he was totally driven, and in any case, not terribly emotionally supportive.

The ethical judgments that I made in parts two & four were mine.  They were not those of Alice Schroeder, Buffett, or anyone in Buffett’s family.  That said, because of the role I play in my church, I have had to counsel some people on marriage.  My results have been good, bad, and indifferent.  Usually I think that I have been called in on the late side, when hope is almost non-existent.  Better to call in a counselor on the early side.

I have known many men, and some women who I would call “pieces of work,” where they are very difficult to get along with.  I’ve seen cases where the spouses of such people succeed, and more where they failed.  In marriage, it takes two to make a failure, leaving aside adultery and desertion.

My opinion is this: if Susie could bear with it for 20 years, she could bear with it for 40 or more.  Buffett was maturing emotionally, and was better able to interact with others.  Susie missed the best years of Warren.

As it is, children are affected even if adults when parents separate; they become more prone to divorce.  Buffett’s children had their own marital problems.  It also doesn’t help when you didn’t get a lot of attention from your father when young.

On the Patience of Buffett

Buffett does not have to deploy capital; he does not have to grow.  He can live with a lot of cash on hand, earning zero.  He knows human nature.  As a group, we tend to panic every five years or so.  Buffett picks up a lot of bargains, whether by sector, or across the market as a whole.  He finds good companies that are out-of-favor, and he gives them a good home.  This is very different than how most people invest.

Buffett waits until he sees a return on book capital with reasonable certainty that exceeds his threshold, and then he buys aggressively.  He can do that because he has a balance sheet, and he has simple goals for return on capital.   So long as he continues to be careful he never has to worry about insolvency — his balance sheet is conservative.

Final note on Religion

Because of who I am, I was interested in how Buffett’s and Susie’s parents viewed religion.  Buffett and Susie were a lot like my in-laws: raised in the church, but turned against God.  There was something in the era, as people sought bad interpretations of the Bible so that they could live their own way, and not God’s way.

Quibbles

Already expressed.  This is a great book if you are looking to read about the life of Buffett, rather than the aspects of Buffett’s investing that you can’t imitate.

Who would benefit from this book:  This book will not help you invest like Buffett, unless you are bright, and know all of the details that lay behind Buffett’s strategies.  This book is the best to help you know Buffett the man.  It is a great book.  If you want to, you can buy it here:The Snowball: Warren Buffett and the Business of Life.

Full disclosure: I borrowed it from the local library.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.


Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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