Why stockbrokers will never understand value investing

Sometimes I read an article that just makes me mad. There was an article in the Brisbane times on 19th Mar 2010 that made me just shake my head – link is below.

I’ve provided a quick summary below.
Basically the article contends that Warren Buffett’s approaches to investing in stocks are outdated and unrealistic and that normal everyday investors can’t achieve the same results as Warren Buffett. He suggests that any value investors have lost 54% of their investment and now need to make 113% to get back to where they were before the GFC. He contends that following Warren Buffett’s methods have cost the average investor more money than its made them.

I strongly refute his contentions, and suggest he provide actual facts before making generalisations.

  • He’s used the market returns as a proxy for a value investors portfolio, when clearly value investors wouldn’t buy every stock in the index. If he understood the value investing approach, he’d realise that most value investors would’ve stopped buying stocks as they became more expensive at the top of the market, and most likely would’ve bought more as the market crashed and provided buying opportunities. As an example, I bought Macquarie Group (MGQ) ¬†shares the day they hit $15, used all the cash I had and suggested to my friends that they “back up the truck”. Macquarie shares are now trading at 3 times that price, so I’ve made close to 300%.
  • Value investors buy stocks when others are selling and sell when others are buying. As Warren Buffett says “Be fearful when others are greedy, and greedy when others are fearful”. Value investors would’ve been buying stocks as the market fell, and as the market rises, will start selling their stocks to take advantage of other opportunities.
  • He suggests there are several approaches put forward by Warren Buffett and are impossible to understand. If he’d read any of Warren’s books, he’d have realised there’s only one approach and is fairly simple to me. Here it is. Buy stocks at below their intrinsic value ¬†and hold them. Imagine you can only make 20 share purchases in your whole lifetime, in other words – keep your trading to a minimum. Stick to your circle of competence – invest in companies you know and understand. How hard can that be?
  • He suggests that buying stocks at the right time is more important than buying the right stocks. Maybe he should have a chat to Centro, Telstra, Qantas, Allco Finance, Babcock & Brown, Timbercorp, FAI, HIH, Qintex, Bond Corporation & any other rubbish company’s shareholders and ask them how their stocks are doing.
  • There’s one thing I do agree with him on. He suggests that investors are impatient, and I totally agree. There’s no such thing as a quick buck, but there’s never a shortage of people looking for it. Perhaps the hardest part of following Warren Buffett’s approach is to be patient. But if you stick to the basics, get some good advice (preferably not from a stockbroker), then there’s no reason why you can’t do well.
  • And so what if the market fell 54%, if you don’t need to sell, you haven’t lost anything yet. Perhaps he should be comparing what super funds’ returns have been over the same time period.

Whenever you read an article by a stockbroker is worth keeping in mind that they are salesmen. They make money for their company by buying and selling stocks, the more turnover the better. Hence they are diametrically opposed to the Warren Buffett Way / value investing. How can they make any money if everyone sits on their stocks for long periods?


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