Forum Archive Index - February 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Bill wrote:
"I cannot understand why people rubbish charts.  If you only used
for entry and exit points it could save you heaps especially on
an expensive stock as FPH."

OK, I'll give this one a go!

Warren Buffett, before he buys a stock, looks back over the last ten
annual reports for his buying target company.   He looks at the 
record of management instituting their business plan.  He goes and 
visits the business on the ground.  He strives to get the best 
understanding he can of the market in which the target
company operates.  Most of all he tries to get a firm fix on what 
gives that business a consumer monopoly.  Once he has done this he 
works out what is a cheap entry price for buying the business.  He 
then files all this information in the back corner of his brain, goes 
out and finds the next ten people on the street and makes his buy 
decision solely on what the majority of them think.

Well, that's all true except for that last bit!   You can see how 
silly it would be if having done all that work, Warren made a 
decision solely on the opinion of other people.   Yet people who use 
charts exclusively are effectively doing just that!  A chart is 
simply a record of what a small fraction of the different part owners 
of that business think over time.   I can guarantee you that none of 
those part owners would have a better grasp of the company's 
situation than Warren.  So why should he listen to them?  He 
doesn't, which explains why Warren doesn't use charts.

A argument has been put forward for using T/A for timing.  But this 
is of limited use to Warren.  Warren knows when a stock he wants to 
buy is cheap, and Warren has a good idea of where the price of that 
stock will go to at some stage in the future.  Exactly when it 
will go up Warren doesn't know, but that is something he doesn't have 
to know!  Warren is patient.  Warren simply waits for the 
market to catch up with him and so fairly price the stock.  Or if the 
stock price goes too far above fair value then Warren will sell.   

Warren targets an internal rate of return of 15% per annum for his 
investments.  This does not mean he expects 15% every year.  But over 
a ten year period the return will be above and below this level 
averaging out to around 15%.  If Warren sees a stock that will yield 
him this amount and it is in a downtrend he will buy it.   Why not 
wait for the bottom?   Because if Warren does that, there is a chance 
that the share will have moved above his target buy price.  If the 
share goes lower he doesn't care because he has already locked in his 
target rate of return. 

Using this approach means that Warren will save far more on 
expensive stocks than a chartist.  He must do, because Warren doesn't 
buy expensive stocks *at all*.  Warren will only buy a share he 
calculates is cheap, no matter what the charts are saying.

SNOOPY





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