Follow the leader!
September 2008
With the markets in turmoil, many are looking to the leaders of the major economies for comfort, guidance and assurance. But are these the right people to look to just now?
What would Warren do?
Are our Presidents and Prime Ministers the people to guide our approach to how we look after our own savings and investments? Or rather should be look to the leaders of the financial world for inspiration here?
Warren Buffet is the world’s richest share investor. Perhaps his investment philosophies could give us direction at this time.
Buffet practices what is known as “Focus Investing”. In bestselling book “The Warren Buffet Portfolio”, author Robert G. Hagstrom sums up Buffet’s investment process as:
“Choose a few stocks that are likely to produce above-average returns over the long haul, concentrate the bulk of your investments in those stocks, and have the fortitude to hold steady during any short-term market gyrations.”
With this description we are provided with a clear and simple way forward.
Quality is the key
At times such as we are experiencing now, it is certain that all share prices are suffering with the market turmoil. Looking forward what we must ask ourselves is “Will my current holdings rebound when the market has corrected?”
Buffet’s approach has always been to look for good quality shares to hold for the long term. Good quality companies will always rebound with the market, while those of lesser quality may not reach the heights they had previously.
Look for the gearing levels of your companies, how their current management has fared in past economic downturns and whether that company’s market can be supported by the new economy as we go forward. Is the share price supported by the net tangible assets of the company? If any of these areas are a concern, now might be the time to rid your portfolio of them. But only those companies that don’t meet your quality control test should be sold off.
Lock it in
If quality is the key, then the “fortitude to hold steady” would be the lock that keeps them secure. While there is always the temptation to convert share assets to cash in such a market, if you hold good quality in your portfolio it makes sense to keep these and ride the storm.
If your portfolio passes the quality control referred to above, why would it not rebound in time when the market is back in favour? There is no reason why it would not do this, so rather than sell now and kick yourself later when you repurchase at a higher price than that which you sold for, instead hang tough, hold on and ride through.
Focus on the future
We are often told that historic past performance is not an indicator of what may happen in the future, and in terms of investment this mostly holds true. However investment is all about the future.
An investor should never forget about their investment time horizon. We often hear of the “efficient frontier” which is based on the premise of the “rational investor”. Unfortunately very few people are rational about their investments and money in general.
Taking the Buffet approach takes the emotion out of the equation. It requires that we rely on logic and good old common sense. If we invest in quality it will always be worth more as time goes on. And if we expect to benefit from it we need to hold it now and over the long term.
Buffet has become a rich man with this simple philosophy. Have there been bad years in his investment portfolio? Of course! Did this stop him from becoming rich? No it did not!
What about managed funds?
For those of us who invest in managed funds, the same principles apply. When looking to invest in a fund, what is the fund management like? What experience do the managers have? Does their investment philosophy see them taking high level risk? What is their track record over different economic markets?
If you are satisfied that your funds stand up to the quality control test, then continue to hold them. If you are not satisfied, consider that:
- With markets down there may be no capital gain if you redeem the fund
- Most platforms do not charge a switching fee
- It might also be a good time to review your platform and look for a level of fees that match the services you require
Now is a great time to review your investment holdings and determine if you should take action on your current portfolio. Be sure to use the services of a licensed financial adviser; with the options provided in their approved product list this can help to make sure you get the portfolio that is right for you.
Ref: The Warren Buffet Portfolio – Mastering the Power of the Focus Investment Strategy by Robert G. Hagstrom.
