simplification on investing

Disclaimer: My sources are from Encarta Encyclopedia, 2002; Buffett: The Making of an American Capitalist; and my short chat with my Macroeconomics professor, Dr. U. You might be familiar with him because he has been featured in many news articles the past couple of weeks due to our local economic problems (oil price hike, rice shortage, inflation and unemployment). I do not advise this post to be used for academic/paper purposes. The following article is written because it amused me.\

As I was reading Chapter 13 of Warren Buffett’s biography entitled, Buffett: The Making of an American Capitalist; I stumbled upon an issue that has lingered my mind for the last couple of days. In 1982, the US economy went into a recession. Ronald Reagan implemented a tax cut to boost consumer spending but the economy continued to suffer; partly because the government was in financial debt to begin with. With fewer taxes, the government could not finance their spending and the deficit grew from around 41B USD to almost 91B USD in a span of less than three years. It was even said that the 91B USD deficit was a conservative estimate because some analysts accounted the deficit to be 150B USD. Companies are not able to borrow money in the long-run because lenders are worried that the value of money would further decline because of the high inflation rate. Companies are then forced to borrow on short-term securities, thus they have to pay back their debts immediately, not being able to take advantage of their profits for the fiscal year.

Something that took my interest was the fact that money managers and investors stayed away from the stock market. Just at the time when quotes are at their cheapest! Money managers kept on saying: Stay out from paper! Stay out from paper! They invested in retail and bonds but not on stocks. How come? At first, I misunderstood what the book said, there seemed to be a commotion regarding the security that certificates represented. A money manager once said: Nobody knows the assurance of the value of paper (stock certificates). I thought, why would he say this? Is it possible that the economy is so bad that your certificate would be worth nothing? Meaning, you lose ownership of the company simply because the economy is so bad? Can the government take away the ownership from private individuals so that they can use the funds to finance the government deficit? Really stupid of me. Really, really stupid.

After our Macroeconomics class, I grabbed the opportunity to ask our dean/professor regarding this subject matter. He then told me that stocks are only worthless when nobody is willing to buy it or if the company went under and they could not finance the repayment of their shareholders’ money. But then I asked how come people were staying away from paper for the risk of the stock being valueless? Is it possible for stocks to be eradicated and lose their authenticity as proof of ownership? He then explained to me that stocks were not being purchased not because they were fearful that its ownership would be taken away but because stocks were continuing to plummet. Most may be so greedy that they want to sell at the lowest price possible. For a short-term investor whose main interest is to buy low, sell high and be satisfied from this profit, this is not a good situation. Thus being writ the famous quote: Whereas short-time investors are fearful of uncertainty; uncertainty is the friend of a long-time investor.

Some people do not care about the short-term fluctuations of the stock quotes simply because they are after ownership. They are interested in dividends and company performance, which is what stocks are intended for anyway. But there are people who would like to take advantage of a short-term gain. They are just after the money from trading without really caring about whatever company it is; who is running it; or whatever it sells. Everything is generic. Company X, Y, or Z is going down and it will go up, why not ride with it? I guess it’s kinda like sleeping around; getting the pleasure without the commitment. Logical naman eh. I just neither like it nor believe in it (as a Catholic and a rational human being).

So I guess it boils down to intentions. If you really like a company, you invest in it for the long-run. Through thick and thin. Not caring about its short-term values but its long-run values. Buffett once said: My favorite investment period is ‘forever.’ For a short-term investor, he would be interested in the short-term gain. How much money could I get from it in the next thirty minutes or two hours? What is my speculation for this company?

Inspired by Buffett’s simplification of business, I came up with my very own simplification of these two investment styles:

In relationships, some go for the short-run; some go for the long-run. Some go for instant gratification and choose to engage in pre-marital sex without the marriage. Merely enjoying the pleasure involved. Some go for the long-run, get married, celebrate their love , have children (although this is not always the case for barren couples) and be together forever (again, not always the case).

Whatever the case maybe, sex is meant to produce something. Just like companies, they are meant to generate something, expected to perform something. Some companies generate good results, some companies generate bad results. Do not be shocked. That’s the way company goes. Again in sex, do not be shocked if you get pregnant or get someone pregnant. That’s really the way it goes.

I think I could do a little better in my next simplifications. I really wanted to come up with quotes like these:

The price level is like virginity. You could preserve and maintain it but once lost, it can never be restored. – Buffett on Inflation

“Splitting stocks are not going to make shareholders any richer. Try slicing a pizza!” – Buffett on stock splitting

Why did you start investing at such a young age? “It’s kinda like sex; sooner or later you just gotta do it.” – Buffet on Investing.

Of course, I do not agree with everything the guy says and believe in. I also do not think some comments are moral but it puts ease in understanding business right?