Rational Investing: Are you the next Warren Buffett? Acquire patience

The richest man in America (just ahead of his bridge-playing buddy, Bill Gates), Buffett is one of the world’s most sought after men for financial advice.

His approach is simple: Buffett buys good companies with healthy balance sheets and strong cash flow, a product or service that he understands, and strong management that will continue running the business.

Although he sits on the boards of the companies, he does not micromanage them, leaving the management in almost all cases to those who had made the acquired company successful.

He is also a patient man, a buyer of companies and rarely a seller. Buffett has stated that with the companies he owns, he would not be concerned if trading at the stock exchanges was halted for five years.

So what does this have to do with the average investor?

Buffett’s method is all that is needed to be successful in the investment world; however, there is not much likelihood that many investors can follow Buffett’s method completely.

It doesn’t have to do with starting out with a lot of money. Neither does the average investor fail because he can’t do the research (public libraries provide plenty of it).

It has to do with the human characteristic of emotion.

Even with all of Buffett’s acumen, if he had not exercised patience, he never would have built Berkshire Hathaway into the company it is today – and that’s the critical difference between him and most investors.

Let’s apply that to today’s market, an ugly (to say the least), gyrating, Tasmanian Devil of an anthropomorphic beast.

For the first half of the year the Standard & Poor’s 500 was down 11.9 percent in total return; and worse, since it was only a 30-day period, was the month of June, which saw the S&P 500 fall by 8.4 percent.

Think that’s bad? Buffett’s company stock has fallen 21 percent year-to-date.

So what did he sell as the markets treated equities so badly? Nothing. It would not surprise me if he reports that he has been buying additional stock in some of his favorite listed companies, Coca-Cola being one.

So while Warren the Wealthy holds on and/or adds to his holdings in an erratic market, the Warren wannabes are trying to time the bottom or simply throwing up their hands in disgust and walking away. And the hedge fund managers, the short-term “my compensation depends on this quarter’s performance” aggressive institutional and mutual fund money managers are dumping stocks damned near indiscriminately.

We are at the point that I wrote about in my March column:

Could it be a sign of capitulation, of throwing in the towel? … Not necessarily the end of the correction, but perhaps the beginning of the end. …. From a fundamental view, there is a tremendous amount of cash on corporate balance sheets, huge investor sums parked in money-market funds, and what can only be described as major sources of confident insider buying of their own companies’ stocks. I do not make light of the mess in the credit markets, whether subprime mortgages and predicted foreclosure rates, failed auctions for auction-rate securities, or the difficulty of marking-to-market securities held by many financial companies. Nor am I blind to the costs of energy and food that are pinching the consumer’s wallet. And certainly, I remain concerned about proposed changes in the tax laws and the politically inspired legislative solutions to economic problems.

Is it too late to sell? Is it too early to buy? Or will the brightest among us follow the Buffett philosophy and not care if the market rides a pogo-stick for months – or if trading is halted for five years?

One last thought: In my 40 years in the business, I have observed that one could always compile a long list of negatives – reasons to not invest – but I never met anyone who accumulated wealth that way.

Clark Davis is a 37-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company. He can be reached at cdavis@slia.com.[[In-content Ad]]