The Iconoclast Investor

You may be the kind of person who automatically genuflects when the name Warren Buffett is mentioned, or not.  My opinion of him has varied over the years.  In my youth, I just couldn’t understand why someone who obviously doesn’t care about money would devote his life to making more of it.  These days, knowing how little he is leaving to his family members and how little he even cares about which philanthropies will benefit from his wealth, I think I understand him a little better.

Not that you asked, but here’s what I think is behind Warren Buffett’s dedicated life of investment:

• He’s good at it and he enjoys it.
• The recent biography analyzing the Oracle of Omaha does a lot of “psychologizing,” but I don’t have much use for that.  Warren does what he wants to do, lives how he wants to live and says what he wants to say.
• If he thinks that the rich shouldn’t object to paying more taxes (and he does), that’s what he says.
• If he thinks the U.S. dollar is going to tank (as he did several years ago), he says that, too.

I’m particularly interested in what he had to say in a New York Times op-ed piece last Friday.  He said it’s time to buy U.S. equities.

It’s interesting because, even though Buffett is the ultimate value investor and I’m devoted to the growth style, our thinking is pretty close.  I’m going to go over what he said pretty closely, including lots of quotations, because what he says makes so much sense.

Buffett’s advice that it’s time to buy U.S. equities is a natural result of his oft-repeated simple rule: “Be fearful when others are greedy, and be greedy when others are fearful.” While emphasizing that he hasn’t “the faintest idea as to whether stocks will be higher or lower a month–or a year–from now,” he says that the markets will turn higher “well before either sentiment or the economy turns up.”  Then, he warns, “if you wait for the robins, spring will be over.”

Buffett sketches a history of the wars and disasters of the 20th century, pointing out that the Dow rose from 66 to 11,497 during the period despite these shocks.  Yet people managed to lose money during this amazing long-term bull market by buying stocks “only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.”

He’s also not keen on the people who are now feeling comfortable about being in cash; As he says, they have an asset that “pays virtually nothing and is certain to depreciate in value.”

Even though Cabot’s growth letters, Cabot Market Letter, Cabot Green Investor and Cabot China & Emerging Markets Report, are extremely heavy in cash right now, we’ve been advising subscribers to be on the lookout for an investable rally.

Where Cabot’s growth strategy finally differs from Buffett’s value strategy is in its investing style.  Warren will be putting money into solid companies with healthy balance sheets, good prospects and attractive valuations, then planning to hold them for years until they achieve a price that’s in line with their value.  This value system is similar to the one found in Cabot Benjamin Graham Value Letter.

Cabot’s growth letters will look for stocks that are already in strong uptrends, which have a history of accelerating revenue and earnings growth and appealing stories.  We will advise our subscribers to hold them until their momentum deteriorates.

In either the value style or the growth style, the idea is to ignore the panic in the streets and the alarming headlines to concentrate on time-tested principles of investing success.  Your style–which should conform to your risk tolerance and investing personality–is much less important than your determination to listen closely to what the market is actually doing.  Buffett says it’s getting cheaper, and he likes that.  The Cabot growth letters say it’s putting in a bottom, and we like that.

Do we see any conflict between his contention that cash is a terrible investment and our contention that cash is your friend in troubled times?  Absolutely not.  He may be moving into stocks at the market’s bottom, but we won’t be far behind him … and the cash allowed us to avoid the market’s crash, too. Cash is a necessity for both of us, and only useful when the risk level of being in the market is just too high.

It’s good to have Warren Buffett on the bull side.  I doubt that he thinks about us in the same way, but then he has bigger things on his mind.