Wednesday, July 23, 2014

Warren Wednesday: H1 1963

Warren Wednesday is back. I won't be able to promise consistent every other Wednesday but I will be getting it out when I can. The ability to learn from the greatest investor ever is too big a chance to pass up.

H1 1963Written: July 10, 1963

Length: 13 pages
Dow return for H1 1963: +10%
Buffett's return:  +14%
Major events: In Gideon v. Wainwright the Supreme Court rules that states have to provide an attorney to those who cannot afford one. Coca-Cola releases its first diet soda, Tab. The first James Bond film, Dr. No, is released in theaters.

Warren starts off by making a good point of comparisons between himself and the Dow. Him being +4% with profit is less satisfactory then when he had a 14.2 margin with him being -7.5% when the Dow was -21.7%. If someone is paying Warren to manage their money you'd expect him to protect it as much as try to make more money and prove his worth over indexes.
Incidentally this was my reasoning why I was in mutual funds in 2008. I learned the hard way that not all fund managers think this way.

Next he talks about his "Generals" and his "Work-outs" as far as sometime one will do good and the other will cause drag on his portfolio numbers. Then later the reverse is occurs. He doesn't come out and use the word diversification but its something we in the present day can look at. Yes all his categories hold equities but diversification can come in many forms, not just asset classes. He has split up his portfolio by how much work needs to be done to unlock profit in each category of equities he invests in. So if his efforts on a board of directors fails, he still has a backup plan. Multiple strategies in a portfolio can be powerful.

That's a big reason I have bond ETFs within my portfolio. At a 10%-15% weighting, I have enough to give some stability to my income and portfolio stats without compromising the overall investing strategy.

Returning to Buffett, he then moves on to talk about Dempster Mill Manufacturing Company. Harry Bottle was brought in to turn the company around and he did. A lot of unproductive assets were turned into productive ones and generated cash which was then used to invest in various securities. They turned the company from a value of $35/share up to $64 mostly from clearing out inventory.

We won't be able to buy out a company outright and turn them around but we can look for similar scenarios where the market miss-values a company. Aileron from No Nonsense Trading originally pointed me to STX. At the time I bought them they were incredibly undervalued and the company announced they were going to buy 1/3rd of their shares back within 3 years. Its because of situations like this where in the day and age of high frequency trading and everyone having computers and analysis that I don't believe in Efficient Market Theory. Not every company is going to turn around. I'm looking at you Staples (SPLS) but if we as investors and stock pickers can be patient enough and not swing for every ball thrown our way, we can wait for the easy pitches and get a hit.

He goes into people taking money out and some tax talk before ending on what I found was an interesting comment.
My closing plea for questions regarding anything not clear always draws a blank. Maybe no one reads this far. Anyway the offer is still open.
Funny how he goes from making this comment and others that his letters are to long to today where 30,000 people come to hear what he has to say.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

1 comment:

  1. Ah, Pulley, it's great to see a Warren Wednesday again. The Dempster Mill situation, and the negative publicity Buffett received scarred him........and made him gun shy about corporate turn arounds. We each have our lightbulb moments, and I believe this was one such moment for Warren.