Warren Pieces: How To Deal With Mr. Market

A periodic look through the archives of the greatest investor in history

In Berkshire Hathaway’s 1987 Letter to Shareholders, Warren Buffett talked about what he learned from the great Benjamin Graham regarding stock price movements. Below is an excerpt from the letter.

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Validea’s Warren Buffett-inspired portfolio is up 109.7% since its late-2003 inception vs. 84.2% for the S&P 500. Check out its holdings here.

The Graham Strategy: An Oldie, But A Very, Very Goodie

Every other issue of The Validea Hot List newsletter examines in detail one of John Reese’s computerized Guru Strategies. This latest issue looks at the Benjamin Graham-inspired strategy, which has averaged annual returns of 15.6% since its July 2003 inception vs. 5.9% for the S&P 500. Below is an excerpt from the newsletter, along with several top-scoring stock ideas from the Graham-based investment strategy.  Continue reading

The Gurus Accessorize with Coach

In his latest Seeking Alpha column, Validea CEO John Reese takes a look at a luxury goods stock that’s getting strong scores from his guru-inspired models: Coach Inc.

Reese notes that Coach shares have stumbled over the past year and a half, with the latest negative catalyst being a downward revision to its forward guidance. “Some weakness in North America, in part due to increased competition, is a driving factor behind the guidance change. Investors also may be nervous that Coach is in the process of changing up its business model, shifting from a handbag/accessory specialist to more of a ‘lifestyle brand,’ a la Louis Vuitton,” Reese explains. “But it looks like the declines are an overreaction. That’s what my Joel Greenblatt- and Benjamin Graham-based approaches … are telling me. Both of these models look for companies with strong balance sheets that are trading at attractive prices, and that’s just what they see in Coach.”

Reese says the Graham- and Greenblatt-inspired models recently triggered a “Trade Alert” for Coach. Historically, stocks that have triggered this alert have gone on to gain an average of about 19% over the next six months, beating the S&P 500 about 70% of the time. Reese looks at the specific reasons why these two models are high on Coach, and why the firm has the sort of “durable competitive advantage” that Warren Buffett likes to see.

What’s Your Advantage?

If you don’t want to put all your faith in luck, you need to have an advantage to beat the market over the long haul. But The Motley Fool’s Morgan Housel says that many investors don’t really think about what their advantage is — or whether they even have one.

Housel notes that, late in his life, value guru Benjamin Graham actually talked about how he thought stock-picking wasn’t for most investors. So many investors had adopted the in-depth, analytical techniques Graham pioneered that it had become tougher to make money with them. Housel thus asked The Wall Street Journal’s Jason Zweig, who wrote the commentary and footnotes in the latest updated version of Graham’s classic The Intelligent Investor, if he thought that meant Graham would have simply had all his money in index funds today. “No, I don’t think so,” Zweig said. “He would advise knowing your advantages and your disadvantages, and not playing a game you have no advantages in.”

That led Housel to think about what his own advantages might be when it comes to stock picking. He offers a couple that pertain to individual investors, including “time”. “I’m patient to the point of obsessive when it comes to delayed gratification,” he says. “I bought stocks all the way down in 2008 and 2009, dreaming about what they’d be worth in 2038 and 2039. That’s a big advantage over Wall Street, whose definition of ‘long term’ is the time between Lightning Round segments on CNBC. If Wall Street is thinking about the next ten months, and you’re thinking about the next ten years, case closed — that’s your advantage.”

Two other advantages individual investors can have, Housel says: the ability to think about stocks as businesses, not stocks, and a steadfast belief in reversion to the mean. “It’s simple stuff, but it’s one of the most powerful forces in finance because, by definition, only a small portion of investors can be contrarians,” he says of mean reversion. “It’s much easier to say ‘I’ll be greedy when others are fearful’ than to actually do it. But those who can truly train themselves to be skeptical of outperformance and attracted to underperformance will likely do better than most. They have an advantage.”