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A way that investors get ripped off and in a sense rip themselves off is based on the culture of performance in the mutual fund industry. Mutual fund managers try to outsmart the market in the short term instead of patiently waiting in the long term where it is more likely to correctly determine if stocks are high or low. So why then does the public pay so much attention to the nonsensical advertising of mutual funds that brag about prior performance in past years? Article: A way that investors get ripped off and in a sense rip themselves off is based on the culture of performance in the mutual fund industry. If you stop and think respecting it there is perfectly no reason that the past has to equal the future. If you have not been particularly successful as a stock investor in the past, for instance, there is no reason that you won’t be unsuccessful in the future. One reason I hope that you are reading this feature is that you want to improve as an investor. Let’s discuss how professional gamblers profit in Las Vegas. Card counters are a type of professional gambler that uses their memory of what card trump have been dealt out of a deck in a game of battering ram (also 21). Since there are only a unique number of each type of card they can increase their bets when it is more likely that they will win then lose. This works now thanks to the shuffle the deck starts with a irresistible composition and a number of games are played until the next shuffle. Toward the end of the deck you can know what may be that will be out if you are paying rapt attention insofar as each hand in the deck is depends on what has been dealt before. There are no professional gamblers who count the numbers rolled on a pair of dice on the craps tables. This is being as how there are only two dice and each roll is different. In other words, each roll of the dice is independent of any other roll. Since each roll is different it doesn’t matter what was rolled in the past. The same thing would happen if the deck in a game of truncheon were shuffled each time among hands. This is a lot like the stock market where we don’t know what the general level will be from time to time in that of random information entering the market in the sort term. Mutual fund managers try to outsmart the market in the short term instead of patiently waiting in the long term where it is more likely to correctly determine if stocks are high or low. So why then does the public pay so much remark to the nonsensical publication of mutual funds that brag hard prior performance in past years? Mutual funds buy expensive ads in newspapers, magazines, and on television where they tout their performance over the past one, three, five, and ten years. The mutual fund industry irresponsibly promotes this “culture of performance,” even though it knows perfectly well that it misleads investors. Studies have shown that if you take the top 10% highest yielding funds in any year, four out of five of them will not be in the top 10% a year later! For this reason I strongly recommend that if you can only buy mutual funds, as in the case of the 401(k), then restrict your purchases to indexed funds like the Vanguard 500 (VFINX). MoneyandShopping - Up To $30.48 Per Sale. - Two membership levels. Ongoing customer support from real mystery shoppers makes our program unique. Less returns! Award Winning. Family Law Secrets Revealed. - Helping fathers get equal rights in custody and divorce issues. Someone who reads the blog sent me this email:
He doesn't. Buffett has said that with something like Union Street Railway - bought back in the 1950s - he saw the margin of safety was that it was selling for much, much less than its net cash. For Coca-Cola the margin of safety was the confidence he had in future drinking habits around the world. Buffett felt sure people would drink Coca-Cola in larger and larger amounts per person per day in countries where Coke had been introduced more recently than in the United States. History was on his side. Per capita consumption of Coke had been rising everywhere for years. In contrast, history was not on the side of Union Street Railway. Passengers - Union Street Railway 1946: 27,002,614
1947: 26,149,937
1948: 24,224,391
1949: 21,209,982
1950: 19,823,933
1951: 18,736,420 Bad trend. But Union Street Railway had $73 in cash and investments – not a single penny of which was needed to run the actual business. The stock traded between $25 and $42 during 1951. So, even at its high for the year, Union Street Railway's stock was trading for more than a 40% discount to its net cash. At its low, the company's cash covered its stock price almost 3 times. Union Street Railway had a big margin of safety. But so did Coke. Buffett believed both Union Street Railway and Coca-Cola had an adequate margin of safety when he bought them. With Coca-Cola it came from human drinking habits. With Union Street Railway it came from the cash and investments on the balance sheet. Buffett was as confident in Coca-Cola as in Union Street Railway. It's just that his margin of safety in one case was people's buying habits and in the other case it was the cash on the balance sheet. Buffett doesn't apply some standard 50% margin of safety to an intrinsic value estimate. He just looks for situations where he's confident his investment will earn an adequate return from day one far into the future. And he wants to pay less than the stock is worth. But that doesn't mean it's necessary to do an actual intrinsic value calculation and then slap on some percentage discount to that value. It just means seeing the obvious. It means seeing that Coca-Cola is priced like it's going to have a fine future when it's clearly going to have an extraordinary future. Or seeing that Union Street Railway is priced like the business itself isn't just worthless but worth such a big negative number that it offsetts the huge amounts of cash and investments the company piled up over half a century. It's not about rules. It's about common sense. Just ask yourself what's the chance you'll lose money on the stock - in the long run - if you buy it at today's price. Buffett figured the chance was very, very low for both Coca-Cola and Union Street Railway. There was no rule to give him the right answer in both cases. He needed to apply a little common sense thinking to each stock's unique circumstances. Talk to Geoff about How Warren Buffett Apply His Margin of Safety Article Index: | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 23 | 24 | 25 | 26 | 27 |
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