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Old September 24, 2003, 12:29 AM
Thomas Rice
 
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Default Re: Why Buffett does not matter?

While WB does acquire whole companies from time to time, he does make investments on the stockmarket, such as his investment in Coca Cola and Gilette.

One of the fundamentals of his approach is the view that buying part of a listed company is no different to buying an unlisted company, or at least the two are not different from a valuation perspective.

You are correct in saying he can channel the cash of some companies he buys, but I don't think that means his approach is irrelevant to everyday investors.

All it means is that you need to look at both the operating characteristics and the capital management skills of the people running the companies you are investing in.

That is, if a company produces a lot of cash, you need to see what they do with that cash and whether it's a good decision. If management are making good decisions, what difference does it make if you personally channel that cash or management does what you would do anyway?

In almost all cases Buffett buys companies where management is not changed, also, so their capital management decisions usually remain unchanged.

Insurance companies, and the leverage Buffett gets by using their free float, is a different matter and certainly is different, but it's important to remember he often uses that free float to invest in non-insurance companies, and the principles used to make those investments can be applied by "ordinary" investors.

While it's true that small shareholders cannot access the cash of companies they invest in directly and immediately, this does not mean any underlying "fundamentals" are suddenly irrelevant. If a fundamental valuation strays too far prices, prices will be adjusted in the long-term. If this does not happen through individual investors moving the price, it will happen when a large investor buys up the company and efficiency is restored. Alternatively if the fundamentals and prices get completely out of whack -- for example if the company has $20 billion in cash, no debt, but is worth $10 billion on market -- shareholders can always vote to return that cash.

Regarding time frames, my approach is to look at how valuations compare to prices over time. I liek to buy things where I think the true value of a stock is higher than its current price, and sell when it corrects itself or a better opportunity arises.

The "buy and hold" approach over a long time mainly works when the value of your company is increasing over time, as happens when a company grows, and can be better than some other methods due to reduced transaction costs and taxes, which can be quite significant.

- Thomas.




http://www.thomasrice.com/
 


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