Writings of Warren Buffet, by Jeff Pierce
Jeff Pierce is a Financial Advisor at Stifel Nicolaus Financial Services in Newport Beach. He has an MBA from the University of Southern California and is a Certified Financial Planner.
He and his partner, Ken Hansen, developed a 4-hour miniseries for clients on the criteria used by the famous successful investor Warren Buffet to identify companies to invest in. (This presentation is a synopsis of that.) He recommends buying a paperback book (or Kindle version) co-authored by Mr. Buffett, The Essays of Warren Buffett: Lessons for Corporate America, 2nd Edition (2008), available at www.Amazon.com.
Mr Pierce reviewed the concepts of ETFs, Asset Allocation, Portfolio Rebalancing, Absolute Total Return, and Derivatives. He started by discussing Modern Portfolio Theory, a pioneering work in 1952 by Harry Markowitz, a student at the University of Chicago. Markowitz developed a mathematical way to think about asset risk, return, correlation and diversification on probable investment-portfolio returns, based on the concept of the standard deviation of the market price over a period of time. Greater fluctuation meant increased risk. Balancing a portfolio to allow fluctuations of the different components to cancel each other out would result in less total volatility and therefore lower risk.
Mr Pierce contrasted this with the commonly understood concept of risk, as the possibility of loss or injury. Potential loss of money is how Warren Buffett defines risk. The beta of a stock is a measure of its past volatility. A stock is typically considered to be riskier after it has dropped, but Warren Buffett made his money buying good companies when their market price was low! He looks at good companies (whose business he can understand), and tries to buy them at their low points, so more volatility helps him get a better price. He avoids complex new high-tech companies if he does not fully understand their products; although a few are these may do very well, many others crash and burn, an illustration of risk.
In real estate, you don’t need frequent reappraisals of a property, and the same goes for stocks (closely following day-to-day fluctuations). Warren Buffett looks for sound businesses with competent and honest management, a good return on shareholders’ equity, and an attractive price. He also looks at cash flow and debt (whether living on borrowed money), in order to know where cash flow is coming from and understand the company’s long-term prospects. He avoids big-growth stocks that he does not understand well. This is a disciplined and consistent philosophy that has served him better than the hot tips and investment fads of others.
Mr. Pierce’s office is in Newport Beach, phone 949-252-1324, or pierceja@stifel.com. The company’s website is http://www.stifel.com; look for the Newport Beach branch.