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Warren Buffett and Charles Munger: Trend Traders?

“I thought you could add a comment to your Buffett page about the total irrelevance of his method to ordinary investors. 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 (which only have burn rates). Obviously this has nothing to do with trading. Masses of people have been misled by all the hype claiming they can use his methods.”
Paul B.

Buy and hold is toast as an investment strategy. Read the Warren Buffett articles at TurtleTrader:

Warren Buffett seems to make the buy and hold illusion look smart, but let’s take a look at why this strategy is dangerous to your portfolio. Below are excerpts from Warren Buffett and Charles Munger’s remarks at their annual shareholder meeting for Berkshire Hathaway. TurtleTrader editorial comments about their remarks follow each quote:

Warren Buffett: We understand technology products and what they do for people. But we don’t understand the economics ten years out — the predictability of it. Is it comprehensible? We do think about it, but we don’t get anyplace. We would be skeptical of anyone who says they can. Even my friend Bill Gates would agree.

TurtleTrader® comment: How can the trends (up and down) of Microsoft, Cisco and Sun be ignored? Buffett bought Dairy Queen, Gillette and Coke 30 years ago. That alone must not warrant blind following. If you trade from a trend following perspective you don’t need to know anything about tech companies’ fundamentals to trade them long or short.

Charles Munger: If you buy something because it’s undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That’s hard. But if you buy a few great companies, then you can sit on your $%@. That’s a good thing. Buffett added, We want to buy stocks to hold forever.

TurtleTrader® comment: Nothing is forever. The best companies go belly up. Trading is not about buying into companies. Trading is about making money. You must rethink your central objective if all you do is buy and hold.

Warren Buffett: Think about a company with a market cap of $500 billion. To justify paying this price, you would have to earn $50 billion every year until perpetuity, assuming a 10% discount rate. And if the business doesn’t begin this payout for a year, the figure rises to $55 billion annually, and if you wait three years, $66.5 billion. Think about how many businesses today earn $50 billion, or $40 billion, or $30 billion. It would require a rather extraordinary change in profitability to justify that price.

TurtleTrader® comment: If your trading technique is designed to ride a trend then firm earnings are not important, nor is any other fundamental data point for that matter. You don’t have to be a financial analyst or accountant to make money in the market. See Microstrategy (MSTR) example.

Warren Buffett: We’ve seen companies with market caps of tens of billions of dollars that are worthless, and seen other companies that trade at 20-25% of their true value. It eventually gets sorted out. But the speculative mania in one area is not creating equivalent discounts elsewhere. We’re not finding businesses at half their real value today. Forty-five years ago, I had lots of ideas and no money. Today, I have a lot of money but no ideas.

TurtleTrader® comment: There have been and will continue to be trends everywhere, where you can make money long and short.

Reader Feedback

This page makes Buffett followers angry. Here are some comments:

“Why not look at the trend of Buffett’s stocks and see why no one comes close to the discipline he possesses in holding onto a trending situation.”
Web Visitor

“The fact that he didn’t buy Intel or Microsoft is just nitpicking.”
Web Visitor

The fallacy of the Buffett legend is the buy and hold mantra he helped promote (which is not exactly what he did to get rich). Buy and hold is not the panacea Wall Street and Buffett proclaim.

More Feedback

The Buffett page continues to provoke feedback from some readers:

“Whilst I recognize and can appreciate your different trading philosophy to Mr. Buffett I am appalled at your presumption to criticize a man that has become reputably the second richest man by employing his techniques. Maybe in 40 years time when you have achieved the same success you will have earned the right to offer such sharp criticism. No I am not an investor in his company/s nor have I followed his lead but I do respect and admire the man for what he has achieved, through his philosophy of investment and maybe if the corporate raiders followed his example the market place would be healthier. By the way IT stocks are not doing too well are they?”
Web Visitor

We consider the last sentence to be the only comment worth responding to. The reader does not understand the nature of trend following. We hope it is clear to you that trend following garners profits in both up and down markets. Trend followers don’t fall in love with any one market or sector. They take opportunity as it comes and simply make money. Up or down, it doesn’t matter whether it’s a tech stock or not.

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Note: The TurtleTrader® site will continue to offer a well-rounded slate of positive reinforcement articles along with critique articles. The combination of the two styles helps the learning process (Negative?).

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