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How To Day Trade Like Warren Buffett
In his seminal book Stocks for the Long Run Wharton School professor makes a fascinating point. He makes a longitudinal study of two well known companies -- Exxon and IBM and comes to very surprising conclusion.
Based on Siegel’s study of the two stocks from 1950 to 2012, IBM outdistanced Exxon in every growth category — sales, earnings, dividends, and cash flow. Big Blue’s earnings growth exceeded Big Oil’s by more than three percentage points per year. IBM was the classic growth stock, Exxon was the classic value play.
Yet Exxon proved to be the better stock to buy. “When your lockbox was opened 62 years later,” reports Siegel, “the $1,000 you invested in the oil giant would be worth $1,620,000, more than twice as much as IBM.”
How come? “Valuation,” the author explains. “The price investors paid for IBM was just too high.”
“Those who bought its stock and reinvested the oil company’s dividends accumulated 12.7 times the number of shares they started out with, while investors in IBM accumulated only 3.3 times their original shares.”
Now I‘ve often made the distinction that investors looks at value, while traders look at price but its is really a distinction without a difference because successful investors and traders both share the same process. That process can be summarized in one sentence -- “Let the market come to me.”
Warren Buffett is notorious for buying stocks at a discount and then holding them for many years as their value is realized. The single most important aspect of his style is that he simply never pays up for an asset. In fact he often will buy beaten down ideas if he feels that the core of the business can survive. This provides him with ample room for error as the downside on such a trade is fairly limited but the upside can be many multiples of the initial investment.
Although I am the farthest thing from Warren Buffett -- his ideal holding time is forever, mine is one hour or less -- I actually find myself to be a kindred spirit of his style. In our chat room I am always selling above the market and buying below. If the trade doesn’t come to me -- so be it. Like Mr. Buffett I would rather pass up on the opportunity rather than initiate a trade at an inferior price. To do that consistently you have to be able to walk away. That’s hard to do for many traders because the siren song of the market is very appealing and the excitement of the flow can be overwhelming. Yet I can’t tell you how many times this approach has saved me from a certain loss.
Buffett’s rule one is “Don’t lose money.” His rule 2 is “See Rule 1”. By letting the market come to him, Mr. Buffett has beaten the averages for many decades in a row. For day traders that’s a lesson to never forget. As professor Siegel has shown in markets as in life the tortoise often beats the hare.