1) Buffett is very good at picking stocks and aiming to hold them for
5-10 years or even
for life. He classifies all the companies into 2 types:
A - Commodity type business - in the long run most companies fell into
this category.
The typical example is oil companies. We buy oil simply look
at their prices and seldom
bother which brand we use. Because of competition, these companies
are unable to
sustain a high profit margin.
B - Consumer monopoly, toll bridge, or franchise type of business -
The most typical one
is Coca Cola. When we are thirsty, most people in the world will
think of Coke. In
supermarkets, convenient stores or fast food restaurants, they can't
afford without
carrying Coke, as it will certainly damage their business. Because
of its excellent
goodwill, Coke is able to determine its price and maintain a high profit
margin.
For holding stocks for a very long term, we should narrow our choice
into these kinds of
companies.
For example, Hutchison in the long term could maintain very good earnings
because it
continues to have some kinds of monopoly power in different area:
Real estates - in the past years
Terminals
Mobile phone - Market leader in HK and I guess “Orange” is something
unexpected.
The other example is HK Bank - it has the largest deposits in HK.
At least in the
previous years, it gives them a great advantage to sustain their profits
( I know nothing
about their business in UK).
Buffett’s portfolio is very limited. In one year, he only holds
five stocks. The famous
ones are Coca Cola and the Washington Post. He thinks the more
you know about the
companies, the less risk you will bear.
2) His theory could not apply to all area of the price movement.
However he knows the
limitation of his theory. He know he could not predict the daily
price change which is
mostly affected by the investors behavior, instead of the company itself.
Therefore, he
set up his strategy by only looking at the earnings, growth and intrinsic
value. He only
cares about the market prices when the investors foolishly dump the
prices far below the
intrinsic value. He simply gives up those companies he doesn't
understand or hard to
predict its future growth. Therefore he did not buy Microsoft.
He doesn't trade very
often but patiently wait for the opportunity to come. For Coca
Cola and the Washington
Post, he has been holding for over 10 years and didn't make any single
one trade.
Comparing to George Soros, I could not say who is right or who is wrong.
They are
simply going in a different approach. The best thing is, we have
to know what the
limitation is. We should not expect a theory could explain all
area of the price
movement, every day, every cycle or every year. The most important
thing is to make
money out of it.
For example, in reviewing my use of moving averages, it is most
profitable in the
significant imbalance of supply and demand, usually 2 or 3 times a
year. When the
market is trading in a narrow range, or relatively equilibrium between
bulls and bears, I
will mostly lose money. Therefore, it should sticks with those
significant price change
periods. In most of the other time, it would be better sit and
watch.
Thanks for listening to me and hope it may stimulate a little bit thinking.