Financial Opinion and Insights

Scared of Stocks? Take a Lesson from Warren!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

If you have to ask, “Warren Who?”, you probably should just pass on this posting altogether.

If you do know who Warren is, read on – you may enjoy this.  I’ll let him talk to you in his own words, taken from The Essays of Warren Buffett, which is really a collection of his reports to Berkshire Hathaway investors.  This from Essay II, Section A, entitled, Mr. market:

“Whenever Charlie and I buy common stocks for Berkshire’s insurance companies (leaving aside arbitrage purchases, discussed in the next essay) we approach the transaction as if we were buying into a private business.  We look at the economic prospects of the business, the people in charge of running it, and the price we must pay.  We do not have in mind any time or price for sale.  Indeed, we are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate.  When investing, we view ourselves as business analysts – not as market analysts, not as macroeconomic analysts, and not even as security analysts.”

The rest of the essay goes on to point out that market movements in the pricing of the company’s stock are immaterial and largely go unnoticed.  Again, it’s the intrinsic value of the company that’s important.  Mr. Buffett says that each day, “Mr. Market” offers him a price for his share of the company; but, if the company is still meeting his business performance expectations (not price performance), he simply ignores the offer.  He says that even though the business may be stable, Mr. Market’s price quotations virtually never are.

It’s an interesting read.   For those of you who want to know how one of the best investors who ever lived does it, I recommend the essays, which I’m sure you can find through one of the online stores.



NOTE:  Jim Lorenzen was interviewed by The Wall Street Journal’s Glenn Ruffenach for an article appearing in SmartMoney magazine.  You’ll find it on page 46 in the September 2011 issue now on newstands.

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and an Accredited Investment Fiduciary®  in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.