The single greatest way to build wealth today is via stock ownership. In fact, if an individual were interested in climbing today’s socio-economic ladder, one should build as many equity positions as possible (see, “Why The Rich Get Richer“).
The king at such a strategy is the great value investor, Warren Buffett (who studied under the great value investor, Benjamin Graham). Over the decades Buffet, (following Graham’s stringent policy of buying stocks that were worth more than where they traded) has built an empire of cash flow by acquiring shares of companies at low prices. Through stock ownership, Buffet has passed Bill Gates as the world’s richest man. It’s that simple.
An example of his value-oriented approach to investing can be seen in his purchase of Sanborn Map Company stock in late 1950’s. At the time, shares traded for $45 per share and yet the value of Sanborn’s portfolio holding was at $65.00.
According to Buffett’s analysis, Sanborn was valued at minus $20 per share. This was a typical Buffet buy. He looked for deals at unbelievably low prices so that there was a large margin of safety just in case the purchase didn’t pan out.
Early in his career, Buffett challenged Graham’s strict guidelines, but apparently over time became sold on the general concept that he applied so diligently over time.
Ultimately, Buffett is all about the sure thing. In the early days of his career, information was rather dispersed creating inefficiencies that could be exploited. Today, that is simply not the case.
It’s no surprise then that Warren Buffett has very little expectations for the stock market today. Finding the slam dunk like Sanborn simply doesn’t happen, or in the very least, isn’t as easy as it used to be. In fact, the only way investors will ever see the kind of bargains of Buffett has bought in the past, would be to experience an economic crash of epic proportion. And we all know, if that happens we’re all in big trouble.
Has Time Passed Buffett By?
Today the investment game is significantly different than in the prime of Buffett’s career (see, “Musings from a Stock Market Spectulator“). Does that mean we should adapt and change the rules incorporating more qualitative metrics to find bargains in the market or do we keep the stringent Graham approach in place as is?
We know how Buffett will… >play the game. If he didn’t adapt the methodology as a young man, he will surely not do so as he nears the twilight of his life and career. Confirmation comes in the form of statements relating to his expectations for single digit returns in the market for the foreseeable future.
Has time passed Mr. Buffett by? I think that may be the case. It’s hard to imagine a young Warren Buffett conceding to single digit returns when he was willing to work for nothing in search of bargains in the stock market. And let’s face it, you won’t get rich generating single digit returns.
With his concession to mediocrity comes missed opportunity. Case-in-point is the recent disclosure that Buffett liquidated a portion of his stake in Anheuser-Busch (BUD) during the second quarter of 2008.
The problem is that he did the selling before Belgian Brewer, InBev made an unsolicited offer of $65 that was finally agreed to at a price of $70 per share. Since the sales were made well before the offer when shares of BUD traded at a lower price, Buffett left money on the table.
With his Berkshire Hathaway (BRK.A) down some 18% year to date, it may be time for Mr. Buffett to hand over the reins to some new blood.
Bargains and inefficiencies in the market may be more difficult to come by, but some great deals are still there to be had. One place to search, may be to look for companies that trade for a value that is less than cash on the balance sheet (see also, “How to Keep this Rally Going“).
These free Sanborn like opportunities are there, but investors need to be willing to take the risk. Given that they can do so with a margin of safety suggests that the Buffett way may still work after all.
I’m not sure why Buffett has become so bearish on the market. Is it old age? Is he tired? Does he have more wealth than he can handle?
It may be all of the above. For now I would stay away from Mr. Buffett and find someone still willing to exploit market inefficiencies for above average gains.
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