Has Warren Buffett lost his touch?
Berkshire Hathaway has lagged the market over basically every time scale for the last 15 years. The main culprit seems to be driven by Buffett’s failure to invest in companies that have become central to the digital economy, a strange twist of irony given the current market’s strong reliance on e-commerce.
Berkshire’s stake in Apple represents almost 25% of its current market capitalization. One-fifth of Buffett’s empire came from one technology investment that was brought into Berkshire’s portfolio only a few years ago.
There’s no doubt that he is an incredible manager of money. No one has quite the track record of beating the market as long and as consistently as Buffett has, and no one likely ever will.
But as Buffett’s portfolio performance over the past 15 years has shown, his investing edge — his alpha — has been on the wane since the dot-com crash and has flickered even more today in the era of monolithic tech giants.
Risk is a mosaic, not a formula
Investors need to have a holistic view on risk. This one has some brilliant insights.
Markets are very dynamic. Markets evolve. If history was always going to be the prologue to the future, then we could all be just reversion-to-mean investors. And we know that does not work in markets.
Risk and Reward is what drives portfolio construction and outcomes. All investment theses stand on their own merits from a risk and reward standpoint. It is important to get your thesis right. Because in a portfolio there are always theses that develop at different points in time. So, when one is not working, the other is, and you get that diversification benefit just from that standpoint.
How to be a very smart contrarian
Trading is a zero-sum game. Every trade you do, you think you’re right. On the other side of that trade is someone who thinks that they are right, and you are wrong. Always. Because of this, the only way to actually win consistently is some sort of information advantage – is that you have to know something the opponent doesn’t. While that is obvious, what is less obvious is how wildly valuable it can be to thoroughly map your opponent’s worldview.
The true edge comes not just from a better understanding of available information, but also a better understanding of your opponent. And a real sense of why they would be compelled to take the other side.
How you can jeopardize your wealth creation
The drive for financial attainment can be your very undoing. The day you decide that you want to get rich FAST, is the day you throw caution to the wind. Once you dull your discriminative ability, you walk on treacherous ground. Think about it – all greed, impulsive decisions, and ridiculous allocation, is the result of wanting to grow your wealth at a rapid pace.
It is not that you have lost your objectivity. In fact, if you spend some time pondering, it would be easy to call out this nonsense. But it is your need to attain financial freedom as quickly as possible that overshadows all objectivity.
3-step guide to understanding the PE ratio
You cannot treat the P/E Ratio as the only criteria for buying or selling a stock.
It is comparatively easier to think about the earning trajectory of a business than about the P/E ratio it will command. There can be a broad range of P/E distribution in a 10-year period for any stock. Betting on the value of P/E is extremely difficult.
For some businesses, the P/E ratio may not be the best measure for thinking about valuation. Financials and insurance are a case in point.
Here is how to use it more effectively.
