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Old September 23, 2003, 01:10 PM
Andras Nagy
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Default Re: Why Buffet does not matter?

I thought you could add a comment to your post about the total irrelevance of WB's method to ordinary investors. Mr. Buffett does not make his money on the markets. He takes control of companies and sets performance targets. He then uses their cash reserves for more acquisitions. This is why he buys insurance firms (which have free cash) & ignores tech stocks (most have burn only rates). Obviously this has nothing to do with trading/investing. Masses of people have been misled by all the hype claiming they can use his methods.

Warren Buffett is one individual who can make the buy and hold illusion look smart. But, let's take a look at why this strategy is dangerous to your portfolio despite Buffet's success.

I am writing this without any malice towards Mr. Buffett and I am not trying to lesser his personal achievement and the good fortune he brought to his investors.

Buy and hold only works well when prices move in your favor. The following advice is better suited to the average investor - when one is caught on the wrong end of the move – one must exit at one point and admit defeat. That is - unless one can take control over the company and control the companies’ cash. Then the consideration of common stock prices is of no importance. Sadly most of us do not have the deep pockets to do such.

What escapes most investors is the mathematics of risk reward commonly known as the edge. If the investor can maintain a risk reward ratio of 1:3 at minimum he/she will be successful in the long run. (Actually risk reward should be higher but risking $1 for every $3 made is a good minimum basis.)

What does this all mean? This explains the earlier statement concerning buy and hold drawback. When taking a position the investor should have some idea of the time frame of his investment and in reference some stop loss limit should be set. Whether mental or actual is a subject of a different article.

Andras Nagy

The Trading Coach

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