My own personal investing style is a blend of various famous investors.
I use both fundamental and technical analysis when I trade/invest.
Warren Buffett is one of my favorite investors. Please note that I have never owned a share of Berkshire, but as you can see from the charts below it has withstood the test of time.
In Warren Buffet's 1992 letter to the share holders he discusses the following:
During 1992, their Book Value had increased by 20.3%
Between 1964 and 1992 book value per share (BVPS) had increased from $19 to $7745 resulting in a CAGR of 23.6%.
Used book value for intrinsic value.
CAGR goal 15%
The number of outstanding shares has changed very little between 1964 and 1992 (1,137,778 vs. 1,152,547 respectively)
Requiring a significant Margin of Safety (MOS) when purchasing stock in another company as a cornerstone of Berkshire Hathaway's success.
Please note that Equity CAGR on the CAGR Report (TM) uses "Total Equity" equity from the Balance sheet because the vast majority of rapidly growing companies split their stock. If a company does a 2 for 1 stock split then the BVPS is cut in half even though the number of shares each share holder possesses is doubled. Another reason I use "Total Equity" is that stock buy backs or reverse stock splits increase the BVPS.
One of favorite Warren Buffett quotes is "Time is the friend of the wonderful company, the enemy of the mediocre." source: http://www.brainyquote.com
The CAGR Report (TM) screens for wonderful companies by looking for a consistently high CAGR. The stocks on the list are sorted by the calculated MOS.
My mom bought her first new car back in 1965. It was a Ford Falcon. She really liked the car. I wonder how much higher her networth would be if she would have bought a used car and invested the difference in Berkshire Hathaway. ;) Of course BH is the exception and not the norm.
Of course there are some companies that exceeded 100% CAGR on their stock price during the 1990's.
It is interesting to note that RedHat (ticker: RHT) had more than a 14000% CAGR from August 11, 1999 until December 9, 1999 when the share price went from $54.50 to $286.25. Of course it also had a very bad CAGR of -89% from December 9, 1999 until September 18, 2001. During this time the stock had a 2 for 1 stock split on January 10, 2000. On a split adjusted basis, the stock went from $143.12 to $3.02 per share.
Compound Annual Growth Rate from 1990 to 1996 approximately: 26%
Compound Annual Growth Rate from 1996 to 2000 approximately: 18%
Compound Annual Growth Rate from 2001 to 2005 approximately
(still positive CAGR but well below Buffett's goal of 15%): 4%
Compound Annual Growth Rate from 2006 to Mid 2008 approximately: 31%
Berkshire Hathaway played a serious game of catchup during this short time frame.
Compound Annual Growth Rate from 1990 to Mid 2008 approximately: 17%
Berkshire Hathaway has exceeded the goal of 15% CAGR over a 17.5 year period.
By looking at the above charts, technical analysis could be used to time entry and exit points resulting in a significant improvement on investment returns. Technical analysis is a major advantage that an individual investor has over the instituitional money. We as individual investors can get in or out of a position within seconds. Instituitional investors often take weeks to accumulate or dispose of share.
As of March 31, 2008, FMR LLC owned 26,481 shares of Berkshire Hathaway Class A stock.
On May 30, 2008 only 950 shares were traded. During the previous 3 months, the average daily volume was 74,678.1
Assuming that FMR LLC wanted to close out their entire position in Berkshire Hathaway it would take at least 2 hours to dispose of their shares if the daily volume was average and they were the only sellers. Of course it would probably take a lot longer since the trading volume today would equal less than 1.5% of their entire position.
On July 9, 2007, Warren Buffet owned 2,567,445 shares.
Let's assume that Warren needed money real bad ;) He issues a market order to sell all his shares. Based upon the average trading volume it would take 34 days to close out his position.
Either of these examples indicates that it takes a longer time for them to open and close positions. Depending upon how fast they wanted to sell their shares it may cause the price of the stock to crash.
Let's take a look at the individual investor that only trades in a ROTH account. Assuming that the maximum yearly contribution remains at $5000. It would take more than 26 years for the investor to "save" enough money in the retirement account to purchase a single share of Berkshire Hathaway assuming that the return on the investors portfolio matches the CAGR of Berkshire.
Of course there are some companies that exceeded 100% CAGR on their stock price during the 1990's.
It is interesting to note that RedHat (ticker: RHT) had more than a 14000% CAGR from August 11, 1999 until December 9, 1999 when the share price went from $54.50 to $286.25. Of course it also had a very bad CAGR of -89% from December 9, 1999 until September 18, 2001. During this time the stock had a 2 for 1 stock split on January 10, 2000. On a split adjusted basis, the stock went from $143.12 to $3.02 per share.
Looking at RedHat, I decided to compare Walmart with Berkshire Hathaway from 1990 to May 30, 2008. Walmart has undergone a lot of stock splits during this period and had a 14% CAGR.
There were periods between 1990 and 1997 when the stock was fairly flat. It also was stuck in a trading range from 1999 to present. As of May 30, 2008, it hasn't traded above the high of 63.97 reached on December 27, 1999.
Between January 2, 1997 (closing price $10.37) and December 27, 1999 the CAGR for the stock price was 83%
Between August 25, 1972 and December 29, 1989.
There are a number of interesting points in the chart above. In particular the year 1987. The chart below will allow us to look more closely at this year.
| Date | Split adjusted closing price of the stock | Additional comments |
1/2/1987 | 2.49 | Stock price at start of the year |
8/11/1987 | 4.49 | Peak Closing price |
10/15/1987 | 3.52 | Closing price before stock dropped 12% the following trading day. |
10/16/1987 | 3.10 | Dropped approximately 12% during the trading day |
10/19/1987 | 2.85 | Black Monday |
12/3/1987 | 2.25 | Lowest closing price of 1987 |
12/31/1987 | 2.78 | Stock price at end of the year |
October 5, 1987 was the last day in 1987 when Walmart (Ticker Symbol: WMT) traded above $4 per split adjusted share. Most technical analysis signals would have indicated it was time to sell long before October.
As you will notice from the charts above, great companies don't always go up. There are periods when they go down or sideways. In my non-professional opinion, combining technical and fundamental analysis yields the best return for the individual investor. I use fundamental analysis to decide whether or not I should invest in a company and then technical analysis is used to time entry and exit points.