On the dawn of an appearance by Omaha God BuffMunga, it's probably fitting that I touch upon the investing approaches of these two super senior legends of financial services. Actually, let's refrain from heading down that route for a few reasons that are cemented in harsh reality:
- You will unlikely amass a fraction of their collection wealth (estimated at $56.5 billion combined).
- You will unlikely amass a fraction of their wealth by practicing what they preach from an investment standpoint. Why? When was the last time you held a stock for 25 years that wasn't gifted by granny? Exactly.
- You will not bring BuffMunga-type riches into your domain seeing as investment banks aren't cutting you sweetheart deal terms and companies aren't tripping over themselves to be in your portfolio.
- Go ahead, become married to trying to unearth publicly traded entities at a discount to net asset value; such juicy "prospects" could leave you broke with a single vicious tweet from Johnny Hackerseed.
- You don't have a contact network nearly as extensive as BuffMunga, your mortgage broker, or at all. Contacts are integral to successful investing (it's great to have an edge) I have come to appreciate; who you know and what they tell are as important, if not more so, than the archaic crap housed in a 10-K footnote section.
Dig my angle? Even if you don't it's the collective truth that must be well ingrained as the masses pack a stadium, snap Instagram photos with a gecko (play Facebook off the event?), and buy discounted furniture to support their newly bought home while also padding Berkshire's bottom line. By no means am I discounting the godly nature of BuffMunga; every parent should rip their children from the Nintendo DS and Facebook whenever Warren Buffett, Charlie Munger or Alan Greenspan make the TV rounds. It's a treat that, although morbid to point out, is winding to a conclusion.
Having kept it real, it's worthwhile to me to devise a plan to win in the markets now, a week from now, a month from now, etc. That process starts with being able to identify the true winners in an earnings season. Whether the graybeards want to admit it or not, earnings season is critical in determining sector allocations and individual stocks from sectors of choice, ditto listening to earnings calls that offer clues on future corporate strategy and performance. Just a single quiver in the voice of a CFO in response to a challenging question from an analyst could be a dead giveaway that trouble is lurking, and that is definitely an intangible tool not found in an 8-K.
Anti-Buffett Investing Toolkit
Be rebellious, acknowledge the future begins today...
Make sure a target company has a backlog and that it's growing: The unit backlog for homebuilders PulteGroup (PHM) and Ryland Group (RYL) increased 34.96% and 57.20%, respectively, in the first quarter. The certainty of backlog (orders could be canceled, but that is not probable currently in housing given very low inventory levels) is comforting during a period of heightened volatility in the markets as on display in April; that peace of mind is something you should desire to pay up to own (Buffett wouldn't necessarily do that, his focus is on valuation.) Ryland had a tighter quarter than Pulte in my opinion, as it notched lower direct construction costs (relative to an industry complaining of higher costs) and a significant pullback in sales incentives.
Trade a stock post-earnings, for real: One occurrence I have seen is that those companies trouncing sales and earnings expectations their stocks continue to advance in the post-earnings period. The market will reconsider its defensive on posture -- Coke (K), Pepsico (PEP) -- and circle into a Cabela's (CAB) given its mind-boggling stellar quarter. This is the market's way of getting positioned for next earnings season and overlooking a valuation sanity check, for now.
Have the cast-iron stomach to bet against a fundamentally lagging company: Warren Buffett never outwardly mentions shorting a stock or buying put options; if he has and my memory is shot due to earnings season madness, then he doesn't discuss it as enthusiastically as benefiting from a rising stock price.
Indeed, Buffett is usually wagering on the dynamism that is the U.S. economy and the prosperity that it brings to corporate America. You don't have precious time for that, however. Select two similar companies, run the numbers, buy one long and position to profit from a pressured stock price in the other.
A good example is United Parcel Service (UPS) and FedEx (FDX), the former won in the latest quarter (it reiterated guidance, FedEx slashed) and basically that winning made the latter look operationally weak on the inside.