Buffett: The Disguised Bond

In this Fortune article from a while back, Warren Buffett elaborates on:
  • How he never knows what any stock will do in a short time frame like 2-3 years. Interesting since the average holding period for stocks from the early 1930s to late 1970s was 4-8 years. Then in the 1980s it dropped below that range and now has fallen to more like 6 months. Much less than than the time frame Buffett thinks you can know what a stock will do.
  • That you don't need to know what a stock is going to do in the short run to be successful in investing. Forecasting near-term movements may be impossible, but it is relatively easy to figure out what a stock is likely to do over the longer term.
He also talks about why stocks can be thought of as a "disguised bond":
    A bond, as most of you know, comes with a certain maturity and with a string of little coupons. A 6% bond, for example, pays a 3% coupon every six months.

    A stock, in contrast, is a financial instrument that has a claim on future distributions made by a given business, whether they are paid out as dividends or to repurchase stock or to settle up after sale or liquidation. These payments are in effect "coupons." The set of owners getting them will change as shareholders come and go. But the financial outcome for the business' owners as a whole will be determined by the size and timing of these coupons. Estimating those particulars is what investment analysis is all about.

    That so many focus their energy on what James Montier calls the "investment equivalent of attention deficit hyperactivity disorder" no doubt helps to create mispricing opportunities for those willing to invest longer term.

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    Buffett: The Disguised Bond
    Buffett: The Disguised Bond
    Reviewed by jembe
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