QUALIPORT
Buffett, Trading and Churning

By Maynard Paton (TMFMayn)
October 8, 2001

Carburton Street, London -- Warren Buffett may have a few paradoxes. But one of them doesn't concern his frequency for buying shares.

Here are two familiar phrases from the legendary US investor:

"Lethargy bordering on sloth remains the cornerstone of our investment style." -- Berkshire Hathaway Shareholder Letter 1990

"An investor should act as though he had a lifetime decision card with just twenty punches on it. With every investment decision his card is punched, and he has one fewer available for the rest of his life." -- Forbes, May 25, 1992

Such a philosophy has worked well for Buffett. Granted, as this analysis of his investments shows, Buffett's had a fair few short-term value plays in his common stock portfolio. But his success in purchasing ordinary shares has been largely based on eight investments, notably GEICO, Coca-Cola (NYSE: KO.) and Washington Post (NYSE: WPO). 

Given the flurry of Qualiport investment activity in recent weeks, it's worth reflecting on Buffett's comments. Since September 18th, this portfolio has bought shares in Lloyds TSB (LSE: LLOY), Emap (LSE: EMA), Carpetright (LSE: CPR) and Johnston Press (LSE: JPR). What's more, the Qualiport also had the genuine possibility of buying about half-a-dozen other shares at some point too. Needless to say, the past month has seen a not-so-slothful Qualiport using up many punches on its lifetime decision card!

So, has the Qualiport been too hasty? Not really.

Essentially, last month's sharp market sell-off led to many investment bargains. And such market turmoil will obviously lead to a concentration of investment activity. Indeed, I'd say most investment decisions of a long-term investor should be made during deep bear markets!

From the earlier quotes, Buffett implies that the stock market rarely throws up superb long-term investment opportunities. And he's right. Going back to the analysis of his stock picks, over 27 years, Buffett has purchased just 8 major long-term holdings. If Buffett's wealth is anything to go by, it certainly pays to be patient and wait for attractive stock prices! 

Qualiport trading

On this point, it's worth recalling the trade history of this portfolio. During the two years following the Qualiport's late 1997 inception, nine different shares were bought. During 2000, one new share was added, while this year has seen the purchase of two more different shares. All in all, and quite unlike Buffett, the Qualiport has bought twelve different companies in just four years.

But returning to Buffett once again, he said: "An investor should act as though he had a lifetime decision card..."

The key word here is act.

Okay, so your Qualiport managers have made plenty of mistakes in their time -- Marks and Spencer (LSE: MKS) and the rest. But the fact is that every time a purchase was made, we took the view of holding those shares for the long-term. Generally speaking, only over a few years will a company's operating performance be fully reflected in its share price performance. Remember too, that when investing directly in the stock market, you are rewarded for your research and results, not for your activity.

So let me stress this:

Of the current Qualiport members -- namely Carpetright, Emap, Johnston Press, Lloyds TSB and PizzaExpress (LSE: PIZ) -- I have no intention of selling any one of them. Indeed, I'm hoping to still hold those same five shares in 2011.

Selling

But of course, things change. Selling any of the five Qualiport companies is a possibility on the following grounds:

* Overvaluation;
* A significantly better opportunity elsewhere, or;
* A fundamental deterioration in the underlying business.

However, selling on the grounds of "external events" is certainly not anticipated. Disposing of shares simply because a recession, a war, a general election or whatever, is said to be looming is pretty much a mug's game. If you're a long-term investor, such events will always occur from time to time. Suffice to say, investing in strong, solid companies that have records of coping with various "background" events is a far better course of action than trying to anticipate or react to the inherently unknowable.

Churning

The number of investment decisions made by the Qualiport during the its lifetime has raised a further issue. There have been one or two charges of churning simply to keep the portfolio of interest to readers.

So again, let me stress this:

Of the current Qualiport members -- namely Carpetright, Emap, Johnston Press, Lloyds TSB and PizzaExpress -- I have no intention of selling any one of them.

I'm sure most readers would agree that a portfolio of real interest would be one that, over the long term, beats the stock market using sound investment principles.

The author owns shares in Carpetright and Johnston Press.