Rational Advisor

I’ve never believed that Buffett was buy and hold, he has traded quite actively.

I also believe that his Berkshire Hathaway is more like a fund than a company. The key difference is that he has a large Pre-Authorized Chequing program (PAC), adding monthly to it’s cash flow from all his insurance companies, especially GEICO.

Insurance companies charge a monthly premium to provide insurance in case of a disaster. Buffett, takes this premium and invests it.

So, if you want to be similar to Buffett, it’s quite simple. Invest in Aa diversified balanced portfolio and then add monthly to it. In times of market downturns add more into it, and then have the patience to let it work.

Recently Warren sold out of his entire holding in PetroChina, so, it wasn’t buy and hold. His key words were Investors should be “cautious” about China stocks. “We never buy stocks when we see prices soaring”… “People should be cautious when they see prices rising”.

Please read those words again “We never buy stocks when we see prices soaring”. Yet, we as investors always try to buy what’s been soaring. Look at all of the decisions being made to switch investments to better performing investments who have had their prices go up. This is something that Buffett would not have done. In fact, he is reducing his stake in those companies.

PetroChina is valued more than General Electric and only behind Exxon, it is the second largest company in the world, in fourth place is another oil based Chinese company China Mobile, and fifth is Industrial Bank of China, all of these are ahead of Bill Gates Microsoft! Now really do they have as much global impact as Mister Softy’s windows program

Of the world’s 25 top valued companies seven are now Chinese.

These are similar to what was seen with technology companies before the tech wreck in 2000.

Now onto the next bubble - Oil

Michael Lynch, president of Strategic Energy and Economics Research Inc, said the current surge in oil prices is more related to geopolitical concerns and speculative plays than to the fundamentals of oil supply and demand. He said oil traders react to the weaker US dollar based on the belief that OPEC will want higher prices to compensate for the loss of purchasing power.

At the same time speculators are flooding into the oil markets, as we hear about more global tensions.

Speculators have always been involved in most of the crashes, as they think they can out manouver the markets in general.

Also, for an update on income trusts - one of the things I look at is cuts in distributiosn as a sense of the industry. Four energy trusts have slashed cash distributions since July, with the prices of their units falling by between 5 and 23% in the months leading up to the cuts.

As a rule energy trusts will cut distributions in order to maintain the exploration and capital spending needed to sustain oil and gas production. As the price of oil and gas goes up the lease costs and other maintenace and equipment costs goes up. This means that there is a higher likelihood of distribution cuts coming down the pipeline.

TD securities predicts that there is a new round of distribution cuts coming.

Think about this carefully, when you are considering making a change, are you doing what is easy or what is right.

Here’s a question that was asked to Buffett at his last annual meeting

Is there a Commodity Bubble?
Not in agriculture, perhaps in copper and oil. At the start of a bubble, it is driven by fundamentals. What the wise man does in the beginning, the fool does at the end. We don’t know how far up a bubble can go. Be careful that everyone will turn into pumpkins at midnight (and there’s no clock on the wall).

As a note China’s CSI 300 stock index has gone up a lot, and even Asia’s richest man Li-Ka-shing said “there must be a bubble” when referring to China.

Investors in China have opened 46 million trading accounts this year, nine times last year’s amount, as individuals poured their US$2.2 trillion in savings into equities. The demand has pushed up valuations of CHina’s stocks to the highest in the world. Only government approved investors can trade in Chinese shares in the mainland, but those Chinese shares listed in Hong Kong can be traded by anyone, since August 20, 2007.

It’s important to realize that crashes - whether they happen quickly or stretch over long periods (Nasdaq since March 2000 fell 78% over two years, Japan Nikkei peaked in Dec 1989 and fel 60% over the next year and a half) - are an unavoidable feature of the financialial markets. They serve a useful purpose by unwinding the speculative excesses that creep into the markets.

As an investor your job isn’t to worry about whether we are heading into a crash or not - nobody can tell you when that is, but to build a portfolio that can understand market panic. In other words you have to be an investor,not a market timer or specualtor.

That means having a portfolio of well diversfied managers, managers that have experienced multiple market cycles. That means, avoiding or reducing the currently highly speculative areas, and NOT chasing funds and stocks that have done well over the last three years!

I know you want to make changes, because you think that by doing an activity you are doing something to improve it. But, if you are doing this change and it moves you into a higher risk, then you are making a move in the wrong direction. I think it woudl be wiser to change to something thathas fallen further - not risen more. Counterintiutitive but very Buffett like

think about it.

Rational

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