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Comment of the week: Following Buffett

It is interesting how advisers use Warren Buffett as example and often misquote his investment strategy.

I’m reading a biography of Warren Buffet at the moment and his investment strategy is to buy cheap stock that is undervalued and to wait for the market to catch up with that valuation.

He seldomly takes short-term positions as he often looks for the long term growth often criticising shared tipsters like Lynch and Goldman in the past. He is famous in not taking much notice of the whims of the market, in fact he concentrates on principles of earnings versus value.

He often buy stock nobody else would buy and cut his teeth in the 1950s when the US stockmarket was still nervous about another depression and had many hangups from the 1930s crash. His mentor Ben Graham his college lecturer and well-known stockbroker of the 1920s and 30s was nearly wiped out in the Wall Street crash and thus became risk averse.

Later on Buffett worked for Ben Graham at his brokerage Buffett became increasingly frustrated with Graham’s lack of appetite for risk and eventually set up his own firm when Graham retired in 1950s. In fact Buffett’s rule was not to be scared of losing capital it was to make sure that you didn’t overpay for an asset as the market will always realise its value at some point.

One of the other things he is very famous for is to try and explain complicated investment strategies in simple to understand language that the common person can understand. There’s a lesson there for many advisers as over my time in financial services I have observed a number of both advisers and firms that choose to complicate subjects may need to hide what is actually going on.

Honesty is always the best policy and listening to our clients and educating them about risk is what advisers should be doing.

Peter Herd


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