Question: How could you manipulate your stock portfolio to outperform Warren Buffett’s stock portfolio?
Answer: Sell Berkshire Hathaway when its rate of price appreciation is uncharacteristically high, and buy Berkshire Hathaway back after it has declined in price.
Easier said than done.
Here is a chart showing the last 7 year performance of Berkshire Hathaway:
The large rectangle shows a five year period, during which there were times when Berkshire Hathaway lost half of its value. During that 5 year long period, because Berkshire Hathaway does not pay a dividend, an investor would have outperformed Berkshire Hathaway by selling it at a high, not owning it for awhile, then buying it back when its price was lower.
To outperform Warren Buffett, all an investor had to do was sell at one of the highs and buy back the same stock after it had dropped only 5% in value. Outperformance could have been achieved at an even lower percentage (like 2 or 3%, even after paying trade commissions) if the trading was being done in a tax-deferred account, like an IRA.
The same principles are true for stocks in general.
Why Am I Telling You This?
It is my opinion, and only my opinion, that as stocks (or any other long-term appreciating asset) increase in value at a faster rate AND trade at the high end of their price range, there is an increased likelihood their price will drop 2 to 5%.
To suggest the stock market will pull back in price is not the same thing as being bearish about stocks in the long term. Rather, it is my estimation that there are certain high rates of appreciation in stocks (or any asset class) that cannot be maintained for a long time. So, even if stocks appreciate over the long term, historically, there have been regular times when stock prices pulled back, sometimes for days, other times for months or years.
Why Am I Telling You This Now?
It is my opinion, in the next two months, we are in one of those rare time windows, where there are improved odds of accurately anticipating a stock price pull back.
If you agree, then you may be able to figure out how to sell at a relative high, avoid some price drop, and later buy back into the same asset class at a lower price. If you can successfully do that, you will outperform the stock market. Or if you prefer, and you own Berkshire Hathaway currently, you might even be able to outperform Warren Buffett this year, while using his Berkshire Hathaway as the tool to do so.
The last 15 years in stock investing reminded stock investors there are risks to just “buying and holding” long. There are also risks to trying to time the market. There are risks either way.
It may sound funny for an investor to be talking about the merits of “market timing” in this time window, because the current high price of stocks could be used as a strong argument to support the merits of just “buying and holding.” Nevertheless, in this time window, I am encouraging investors to consider the merits of infrequent market timing moves, especially when stocks (or any other asset class) have appreciated at a higher-than-normal rate and are trading near long term highs.
Disclaimer: These posts are not written by a professional or licensed financial advisor. There’s nothing for sale here. This is just a discussion forum. No one should make any decisions based on representations made on this informal blog. These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions. Any significant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.