This page is quite old hence its rather spartan appearance.
Why not check out our Latest Stories page for our newest articles or search our site for anything.
By
An easy mistake, and probably disastrous if industry growth is non-existent. Buffett likes businesses that have little or no direct competition. Take supermarkets. There are half-a-dozen major chains, all selling the largely the same products. How do they all compete? On price, mainly. In a mature market, the threat of a severe price war over your commodity goods is not an invitation to long term investment (and yes, that is a pop at the TMF Staff Investment Club decision!). Buffett has never praised the economics of a supermarket. Why should you?
From my own personal experience, I can't think of any easier business to get into of late than becoming an IT recruitment agency. With recent Y2K demand for IT personnel, IT recruitment appeared a one-way growth bet. And indeed that growth duly arrived. The trouble was all the extra revenues were shared among numerous additional players. You see, getting into the IT recruitment bonanza is very straightforward.
Another no-no quality. Take toy manufacturers. The danger here is fashion. Public demand for toys changes each year. As a manufacturer, you don't want to be making Teletubbies when everyone's kids want Ninja Turtles. Toy development and and manufacturing is far too "forever changing" for Buffett. Buffett looks for the predictability in demand of a company's products. He doesn't rely on company management to keep on top of ever-changing customer whims.
Buffett is famous for avoiding all so called "technology" companies. Why? He doesn't understand them, or at least their products. The technology constantly changes too. If you are going to mix the LTBH with a cutting-edge technology company, make sure you have a deep and specialised understanding of the industry. Although technical patents fend off competitors from your innovation to some extent, giving the "barrier to entry", there's nothing to stop some else surfacing with an even newer innovation and dumping your patent in the dustbin.
Hands up who topped up their portfolio significantly last Autumn? I didn't. I was too busy worrying. Buffett suggests buying on stock market declines. Of course, stock markets decline usually on the anticipation of poor economic news. But why worry if your company has a strong business franchise? When your company is a commodity business or has a flaky and unproven business operation -- then that's the time to worry if the economic horizon darkens. If you're LTBH in an economic franchise, then use market declines to consider topping up.
An easy way to go wrong. Investors sometimes use mechanical strategies to pick shares. However, when things go wrong (as they often do) and the shares don't perform as expected, investors jump to the LTBH for comfort. One popular mechanical method has been an approach defined by Jim Slater. Investors bought shares on various "snapshot" statistical criteria because history had "proved" they were likely to outperform. When the anticipated share price rise didn't materialise, investors suddenly became LTBH. If you rely on a mechanical buy signal, you must rely on a mechanical sell signal. And don't get caught up in charts when buying either. There's no place for them in the LTBH toolkit.
If you're as picky a stock picker as Buffett, then you're are likely to experience a shortage of suitable investments from time to time. Buffett has never said you can't "dabble" in other short term "value plays". But just make sure you've calculated the risk/reward ratio to be heavily in your favour first. I've read somewhere that Buffett's record of never having a down year and consistently beating the Dow Jones rested upon various "arbitrage" investments in some years. Although not exactly arbitrage, there must have been some "value" reason Buffett bought into Allied Domecq (LSE: ALLD) -- it's hardly in the same LTBH league as Coke.
Uncle Pyad wrote: "People go to great lengths, write many books, to discover the secret of highly successful investors like Warren Buffett. They try to turn this into a repeatable formula so that anyone can, by following the principles involved, become as wealthy as the individual concerned".
He adds: "Those who try and emulate the masters in a great number of cases will not possess the master's nose; the unquantifiable something that great investors possess."
Oooerr! This looks worrying, with the Qualiport broadly following the principles of Buffett's success. On the Qualiport's performance to date, some would say we just don't have that "nose" for stock picking. That Qualiport nose has been well and truly blocked at times.
I won't try and argue about whether or not the Buffett strategy can be successfully followed by anyone. I'll simply say I firmly believe it can -- it's just making sure you understand all of Buffett's investment principles. Most mistakes arrive from following just one of Buffett's core principles -- long term buy and hold (LTBH).
Of course, it all doesn't depend on LTBH. Buffett's famous purchases have been the likes of Coca-Cola (NYSE: KO) , Gillette (NYSE: G) and Washington Post (NYSE: WPO). Buffett calls all three "franchises". He describes a franchise thus: "An economic franchise arises from a product that (1) is needed or desired; (2) is thought by its customers to have no close substitute, and; (3) is not subject to price regulation."
It's this franchise concept that investors emulating Buffett with the LTBH, from reading the Fool boards, easily seem to forget. Not only the franchise concept, but also the constant "ever-changing" nature of an industry. A simple mistake to make is to consider that the company exists in a vacuum -- that historic performance will continue indefinitely without further competition. Finally, Buffett also puts a heavy weight on certainty, another thought that appears to get lost in the technological go-go era of today.
So, a quick run through of those, and other, typical LTBH mistakes potential Buffett "investalikes" make.
Too competitive
There are no barriers to entry
Step 1: Ask just one company for their IT staff requirements.
Step 2: Advertise in a trade magazine with very optimistic salaries.
Step 3: Wait for CVs to roll in.
Step 4: Tout CVs around every company you can think of, trying to "place" your candidates.
You only need money for the advert and a phone. Look for high brick walls protecting your company's profits, not an open door.
Forever changing
Too technical
On topical example is ARM Holdings (LSE: ARM). A recent message board post stated that the buyer would be holding for 10 years, certainly LTBH in action. Buffett probably thinks about ARM this way -- had anyone heard of ARM three years ago, five years ago, not to mention ten years ago? Think how microchips have changed since 1990. Will ARM still be at the top of the tree in 2010? Maybe, who knows. With ever-changing technology, the LTBH here requires constant industry monitoring and expertise. Can you keep up with the pros?
Paralysed by worrying over market declines
Jumping to LTBH when things go wrong
Focusing too much on the LTBH
This is by no means a definitive list. If you can think of any other LTBH dos and don'ts when emulating Mr Buffett, let us know on the Qualiport message board. We'll be glad to hear from you.
Related Links
Company Change Bid DELL(US)+0.80 45.40 EMA +0.87 13.05 IIG 0.00 2.73 MSY -0.01 8.06 PIZ -0.10 7.60 RTO -0.02 2.38 ULVR 0.00 4.38 LLOY -0.38 7.24 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 22/04/99 542 Misys 5.57 8.06 44.6% 17/04/98 301 Emap 10.20 13.05 27.9% 27/10/98 1133 Indep Ins 2.60 2.73 5.0% 27/01/99 74 Dell (US) 44.63 45.40 1.7% 04/11/98 245 Pizza Exp 7.93 7.60 (4.1%) 29/09/99 356 Lloyds TSB 7.56 7.24 (4.2%) 19/12/97 783 Rentokil 2.55 2.38 (6.7%) 17/07/98 266 Unilever 7.53 4.38 (41.8%) Last Rec'd Total # Company In At Value Change 22/04/99 542 Misys 3065.85 4368.52 1302.68 17/04/98 301 Emap 3139.85 3928.05 788.21 27/10/98 1133 Indep Ins 2990.63 3093.09 102.54 27/01/99 74 Dell (US) 2007.42 2036.12 28.70 04/11/98 245 Pizza Exp 1966.34 1862.00 (104.34) 29/09/99 356 Lloyds TSB 2723.20 2577.44 (145.76) 19/12/97 783 Rentokil 2046.53 1863.54 (182.99) 17/07/98 266 Unilever 2052.00 1165.08 (886.92) Cash: £ 28.46 Current Total : £20,922.30 Total Invested: £20,184.62 Profit/(Loss) : £ 737.68 Value Per Share Day Month Year Qualiport 0.56% 5.05% -0.93% FTSE 100 -0.62% 0.34% 12.53% FTSE All Share -0.54% 0.57% 16.10%