Wednesday, May 8, 2013

2013 Berkshire Shareholder Meeting - Part II: Buffett on Timing Purchases

***Update: Separated today's earlier post into Part I & Part II. A shorter version of the following was initially in the bottom half of Part I.***

According to The Motley Fool, here's what Warren Buffett said at the 2013 Berkshire Hathaway (BRKa) shareholder meeting about attempting to time the purchase of marketable securities:

"If they try to time their purchases they will do very well for their broker and not very well for themselves."

I realize some will continue to try and time their purchases (and maybe some are even good at it), but the right time to buy or sell any asset is rarely if ever obvious. The good news is it's not all that important to get the timing right if you can judge value well, and always buy that value at a discount (i.e. dollar bills for fifty cents, especially if those "dollar bills" increase intrinsically in value over time as most good businesses do).

The right price to pay for an asset may not be an easy thing to figure out but is, by comparison, at least doable with some work (and a good understanding of business economics, of course).

Those that try to get the timing and price right are making the job more difficult than it needs to be. When something becomes plainly expensive, avoid it. When something becomes plainly cheap, buy it. Always buy with a nice margin of safety. Do these things consistently well and timing things right becomes far less relevant in the long run.

It is as Seth Klarman said in his 2010 annual letter:

"Risk is not inherent in an investment; it is always relative to the price paid."

What's sensible and low risk at one price is risky at some higher price. Getting that right consistently is difficult enough.

Add timing to the equation and errors of omission along with other misjudgments are almost certain to increase.

In the short run (and even longer), poorly timed investments can certainly lead to temporary paper losses -- sometimes rather substantial. Market prices in the short run can do just about anything.* That's a problem for those who speculate on price action. Yet, for those that take more of a long-term investment approach, a declining price shouldn't matter as long as the price paid represents a discount to per share intrinsic value and the business has attractive and durable core economics. If anything, it is a net benefit when prices go lower over the near-term or even intermediate term since more shares can be bought below value (both by the company via buybacks and by the investor over time). It is only when it comes time to sell that an investor should hope that price fully reflects the -- if a good business -- increased per share intrinsic value many years down the road.

So getting the timing wrong matters little in the long run if an investor generally judges value of a good business correctly in the first place and buys at a price that represents a discount. In the short run, the "voting machine" can create nonsensical prices but, in the long run, the "weighing machine" will adjust to something that more closely reflects per share intrinsic business value.

It's only when price versus value is judged poorly that the long-term investor becomes exposed to the risk of permanent capital loss.

It's getting the valuation roughly right, within a range, then make purchases with an appropriate margin of safety to account for most of the worst outcomes.

The appropriate margin of safety is necessarily different for each investment.

For the long-term investor, getting price versus value right is all-important. Attempts to also get the timing right is often just a foolish distraction and, worst case, very costly.

Tempting, yes, but generally unwise.


Long position in Berkshire (BRKb) established at much lower than recent prices

Related post:
2013 Berkshire Shareholder Meeting - Part I

* Paper losses may not be pleasant but consider this: When a business that isn't public is bought (with the intent to own it longer term), the new owner(s) generally will not focus on what someone else tells them it is worth day after day (or, in the case of the stock market, every second). They focus on the income stream the business produces. They focus on whether that stream of income relative to the price they paid remains attractive. They don't sit their considering what other "voters" are saying the business is worth in the short-term or even longer. To a business owner, the price of only matters when buying or selling. It's the same for a partial owner of a business but unfortunately the minute-by-minute quoted value becomes a distraction for many market participants. It is only those speculating on market price action who should expend their energy thinking about near-term quoted prices.
** Missing the chance to build a meaningful position in (or missing entirely) a well understood business you like that was at one point was sensibly priced.
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