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Tuesday, 14 October 2008

Buffett-style investing shines

VANDERMIR C.T. SAY started investing when he was 12 years old. That was 22 years ago. He recalls picking stocks the way he would play darts. Not anymore. For the last decade or so, Vandermir has become a Warren Buffett-follower, investing only in good companies at good prices and buying them for the long haul.

In the last couple of months, amid cascading losses in markets all over the world, Buffett's value investing philosophy has attracted.

The fact that Buffett, the world's richest man according to Forbes magazine, has emerged as Wall Street's knight in shining armor after injecting funds into Goldman Sachs and General Electric a week ago has most likely upped the ante significantly on value-style investing.

And if the sale of Buffett's first and only authorized biography 'The Snowball: Warren Buffett and The Business Of Life' written by Alice Schroeder (editor of Berkshire Hathaway's layman-friendly annual reports) is any indication, the interest is just heating up. Just days after it hit bookstores in Sept. 29, the book has claimed a top spot on Amazon's best-selling book list.

Say, the Chartered Financial Analysts of the Philippine's new president, explains that value-style investing is based on very simple principles. 'All we look for are good businesses at good prices,' he says.

What makes a good business? One that you're absolutely sure will make good money in the next, say, 20 years and run by highly capable management with high integrity. That means you only invest in businesses you understand -- a trademark Warren Buffett philosophy.

In this day and age of extremely volatile markets, the value investor is unfazed because he buys and holds for as long as he needs the investment. He is not concerned about fluctuations. His life is relatively simpler and less harried because for him, Wall Street can wallow in its own toxic securities.

Contrast that with an investor who makes money from trading stocks or bonds and who had to watch his portfolio drop more than 20 percent in the last couple of weeks, asking himself every morning, 'Is this ever going to end?'

In fact, Say says, some value investors he knows who have the extra cash are now revving up for acquisitions. After all, prices are low and whether in good or bad times, a good business is a good business.

'In general, what is happening is good for us because the crisis is pushing down prices. My job now is to look for good businesses,' Say says.

Whether in stocks and bonds, Say says good opportunities in the market are starting to emerge. He declines to say what are good buys, but gives tips: Look for businesses that are managed by people with high integrity and find companies that respect the rights of minority shareholders. Those two criteria alone will shorten the list of good bargains out there in the market, he says.

'Right now, Buffett can buy almost anything in the market, but look at companies that he is buying. Goldman and GE, companies that are being run very well - Integrity is important, the goodness of a person is important. What if you meet some guy with no integrity but you can probably make $200 million, you should say no. Why go through all that stress? There are better ways to make money,' he adds.

These may sound like dreamy principles in a day and age where everything is measured by money and returns. But it also uncannily explains why Wall Street is tottering like a drunken lunatic in a suit: Greed is the root cause of the subprime mortgage problem. Even more greed by investment bankers and hedge fund managers blew that out of proportion through derivatives instruments disclosed in legalese language very few understood.

'Buffett and Charles Munger (Buffett's business partner) have attacked derivatives three or more years ago. Munger said comparing derivatives to a sewer is an insult to sewers. Now in this crisis, what is the value of his advice? Multibillion dollars because what are the key to the problems now? Derivatives,' Say explains.

That said, Say doesn't see the popularity of value investing to stay for long. 'It is the flavor of the year, but if you are asking if it will generally be much more popular than before, I would guess not. Buffett learned from Benjamin Graham more than 50 years ago. It is not a secret; it has been around for a long time. But it has never been a popular style,' he says.

Reading annual reports and understanding what makes a business tick takes a lot of patience. It's based on analysis, and not a quick tip to make a quick buck by flipping a stock or bond. Adhering to those principles and being disciplined is the hardest part, says Say, because old habits die hard.

'There are a number of value investors here in the country. They are in the minority, as well as with any other market, even in the US,' he says.

And do they make more money than the flippers? Say knowingly smiles, and says, yes, they are wealthy.

The 32-year-old investor tries to emulate Buffett not just in investing but also in the way he lives. Buffett, the shy billionaire who is also called the Oracle of Omaha, still lives in his house in Nebraska that he built more than 50 years ago, doesn't have a driver, is brand loyal, and highly values integrity. Say uses an old model mobile phone and says his passion is helping people live better lives.

'My clients have been calling me about the book (Snowball) when it came out, and they were very excited about it. It's like our Harry Potter,' he says with childish excitement.

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