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Why is the 'World's Greatest Investor' Obsessed Only with Stocks?

Sep 15, 2016

In this issue:
» Wilbur Ross warning to the US Fed
» Cyrus Mistry's major achievements
» ...and more!
00:00
Rahul Shah, Co-Head of Research

Warren Buffett has invested in things that most never associate with him. I've written to you about the farm he bought in 1986 and a commercial real estate property he picked up in New York in 1993.

But that's a mere 0.01% of his investments.

The rest is all stocks. This man lives, breathes, and dreams stocks.

So why this focus...this obsession...with stocks? There're so many other assets to invest in. Shouldn't the 'world's greatest investor' be investing in a lot more than just stocks? Even the common junta makes a point to invest in a range of assets...

Now, as I showed you, Buffett's rationale for his land and real estate investments was nearly identical to the rationale he uses for stocks. All the more then...why this overwhelming focus on stocks?

Let me tell you, his choice of stocks over all other assets is no coincidence. Buffett is a shrewd guy. He knows that stocks offer him something that no other asset can: minute-to-minute, wildly fluctuating price quotations.

And why do these unstable quotations make stocks so attractive? In Buffett's own words:

  • It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings - and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his - and those prices varied widely over short periods of time depending on his mental state - how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.

So there it is. The reason most investors run away from stocks is precisely the reason Buffett runs towards them - volatility.

For most investors, volatility means risk.

For Buffett, volatility means golden opportunity.

No other asset prices bounce around as much as stock prices do. And a true investor fully understands that these unstable, manic-depressive price fluctuations take nothing away from him. That's because the underlying value of the companies he owns does not change as wildly as the stocks' price does.

So if your co-stockholders are shouting out silly price quotes in the market, just ignore them. Give them some time, and they'll come to their senses sooner or later. The poor souls do you no lasting damage really.

On the other hand, these fluctuating prices offer an investor something very valuable: the option to take advantage of them.

When prices are irrationally low, you can scoop up a company worth Rs 100 for just Rs 50! And, if you'd like, if the price suddenly shoots to Rs 150, you can sell.

For the guy who knows his way around company values, stock price volatility can mean making an obscene amount of money.

No wonder Buffett is obsessed with stocks.

Now, you are probably thinking 'this is all theory...it probably doesn't actually play out like that in the real world'. Well, it does...and here's how you could make this approach work for you too...

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02:56 Chart of the day

Come December 2012 and Cyrus Mistry, the Chairman of the Tata Group of companies will complete four years at the helm. So how has been the share price performance of the group companies under his watch? Well, not bad if you ask us. As today's chart of the day highlights, the top five in terms of share price performance have given returns ranging from 83% for Tata Motors to as much as 257% for Voltas, the leader of the pack.

Of course, the gains in the stock price is also a factor of the starting valuations as well as the valuations currently and this is precisely where companies like Voltas and Tata Communications seemed to have gained. Besides, it would be a little premature to say that Mistry has had an important role to play in the share price movement of these companies.

To his credit though, he has made some correct moves post his appointment, like the big writedowns he initiated at group companies like Tata Steel, Tata Chemicals and Indian Hotels. Besides, the exiting of certain loss making and non-core operations is also laudable. To us, he is certainly laying a strong foundation for capitalizing on the next wave of growth.

Best Performing Tata Group Companies Under Cyrus Mistry


03:46

The turnaround specialist and billionaire investor Wilbur Ross doesn't think the US economy would be pushed into a recession if the Fed hikes interest rates. On the contrary, the Fed not hiking rates is more likely to lead to a recession as per him. Newsmax reports him as saying that if 25 basis points is all that's keeping this economy together, we got nothing going.

His argument is that if we don't increase rates now and then when we have a recession couple of years down the line, there will be nothing in the Fed's toolbox to fix things. Consequently, it is better that the rates are hiked now so that they can at least be lowered when there's a real recession.

Of course, the Fed does need to hike interest rates as per us. But the fallout isn't likely to be as muted as Ross is hoping it to be. There's a strong possibility that the rate hike sets off a series of events that really lands the global economy into trouble as the underlying fundamentals aren't that strong. At a time when most of the developed world is up to its eyeballs in debt, even a small rise in interest rates could make servicing the debt a difficult proposition. On the other hand, interest rates can't be taken any lower as they are already close to zero. Honestly, it is a classic case of being stuck between the devil and the deep sea.

04:26
  • Our youth now love luxury. They have bad manners, contempt for authority; they show disrespect for their elders and love chatter in place of exercise; they no longer rise when elders enter the room; they contradict their parents, chatter before company; gobble up their food and tyrannize their teachers.

Now, whether you agree or disagree with this, you are probably wondering what this quote is doing on a page that talks about markets and investment. Well, we can assure you that it is exactly where it should be. You can click here and read the full article by Apurva Sheth from Daily Profit Hunter where he connects this quote to the markets.

04:46

Meanwhile, Indian indices traded flat today with the Sensex lower by around 20 points at the time of writing. BSE Small Cap index was seen bucking the trend by trading marginally higher. Amongst sectors, FMCG and Healthcare stocks were finding favour while banking was out of favour.

04:56

"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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