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Mistakes that Buffett can afford...you can't - Views on News from Equitymaster
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  • Feb 28, 2012

    Mistakes that Buffett can afford...you can't

    As always, going through the master value investor's annual dollops of wisdom to the shareholders of his company was a treat. But Buffett's 2012 communique to the owners of Berkshire Hathaway stocks seemed to have more than just that. In more ways than one, Warren Buffett has tried to reinstate confidence of investors in his decisions, whether they may be to buy or to sell. But more importantly, some of the logic that he seems to be putting forward, no longer seem to be as applicable to retail investors as they once did.

    Betting on US economy's long term growth: You may call this being patriotic. But for an investor of Buffett's stature, being patriotic cannot be the only reason for being overweight on a bleeding economy. Buffett's faith in major companies in the US may not be out of place. After all, some of the giants have weathered more storms than few companies globally can claim. However, their decision to invest heavily in local projects being need not be an indicator of the economy's long term growth prospects.

    For we know that there are cash rich entities like Apple that are committed to investing overseas rather than in the US. Hence, when it comes to economic trends, whether in the US or India, retail investors would be better off paying heed to facts rather than opinions. Without getting besieged by tons of statistics, all you need to do is look at sustainable long term growth and inflation trends.

    Betting on big dividend receipts: This is not the first time that Buffett has expressed his inclination for fat dividend cheques from the companies he owns. High dividend paying stocks are certainly a must have in one's portfolio to keep returns reasonably steady in volatile times. We are completely in sync with Buffett on this. But for a retail investor to rely heavily on the dividend pay cheques, the exposure to the high dividend stock needs to be exponential. Hence unless you have a very large sized equity portfolio, betting on large dividend receipts from single or few stocks may not be the most productive of ideas.

    Betting on troubled companies for prolonged period: When looking for value buys, you obviously should concentrate on entities that are going through a temporary rough patch. As Buffett's famous saying goes, you have got to be greedy when others are fearful. But mind you, unlike a big investor like Buffett, retail investors cannot take it upon themselves to salvage a company's reputation. Hence, unlike the legend's determination to stand by his troubled companies through thick and thin, you have to measure your risks judiciously. At a very high margin of safety in valuations, a very small exposure to risky stocks may be okay. But a prolonged period of low earnings visibility and poor returns should sound the warning signal for retail investors.

    Betting on change of managements: Here Buffett seems to be parting from his own preaching "You should invest in businesses that a fool can run, because someday, a fool will." On one hand Buffett gives the thumbs up to Wells Fargo Bank for the sturdiness of its business strategy. On the other, his opinion on Bank of America seems to be clouded by the fact that he got the stake at very attractively priced warrants. What else can explain his optimism with the new management of the bank undoing the wrongs? This despite the fact that business model continues to have all the elements that caused it to falter?

    There is no denying that the takeaways from Buffett and his partner Charlie Munger's account of their value investing experiences through the letters are priceless. However, the fact that retail investors cannot afford to duplicate the same for their own portfolios without understanding the implications remains pertinent.

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      Tanushree Banerjee (Research Analyst), is the editor of ValuePro, The India Letter, and Stock Select, Equitymaster's oldest recommendation service. She is also the editor of Equitymaster's most popular newsletter read by over 200,000 subscribers, The 5 Minute WrapUp. Tanushree started her career at Equitymaster covering the banking and financial sector stocks along with scrutinizing the RBI policies. And over the last decade, developed our research processes that have helped us pick out various multibaggers, across all sectors. A firm believer of "safety first" when it comes to investing, Tanushree closely follows the investing philosophies of Warren Buffett, Jeremy Grantham and Joel Greenblatt.



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