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April, 2002


On the road to investment success, one aspect of a value focus that gives its adherents a big advantage, per John Train, in The Money Masters, and Bruce Greenwald, et al, in Value Investing - From Graham to Buffett and Beyond, is that they try to limit their fields of investigation to their levels of competence. Sometimes this might take the form of simply searching out and finding really good professionals to do the job for us, at a small price, and likely as well as, if not far better than, we can do it ourselves.

As Warren Buffett has pointed out, for the achievement of wealth or financial independence one needs just one good idea. Why not: invest with the best?

The odds against the part-time, individual investor (certainly including myself) beating the long-term records of the likes of Wallace Weitz, John Neff, Michael Price, John Train, Martin Zweig, or Peter Lynch are enormous. An amateur should probably only try if selecting stocks is a hobby of intense personal interest.

Particularly in the financial realm, to realize one's limitations can be a profitable insight. So, even as we may dabble at the interesting endeavor of researching and purchasing company shares ourselves, why not a little wealth insurance, just in case it turns out we are not quite as good as the Warren Buffetts or John Templetons of this world. The "premiums" for this insurance would simply be whatever we care to set aside for buying shares in top quality stock holding companies or mutual funds, managed by the investment community's finest.

Though often undone in bear markets by too much reliance on high margin debt levels, my father had a pretty good record in the stocks he bought. Nonetheless, he was realistic about Berkshire Hathaway (BRK/A; BRK/B), taking a significant position in that company, not because it looked cheap at the time or was otherwise a special situation, but since he could admit that Warren Buffett, BRK's chairman and chief shareholder, was a better investor than he.

"If you can't beat 'em, join 'em!" he declared in announcing the purchase. Unoriginal, but good advice for the average value investor. (An added benefit of investing with the great: even if one were somewhat above the mean as a stock selector, he or she may still glean suggestions from reviewing the quarterly and annual reports of investment mentors. This led us, for instance, to profitable stakes in American Express [AXP] and Washington Mutual [WM].)

If you think placing all your "insurance" eggs in one equity guru basket a bit chancy, why not invest through several, to spread the risk around?

Once they are in your portfolio, resist the urge to trade them unless, over a several year period, they have clearly lost their edge. Instead, to truly see the advantage of value investing, try to hold on for the very long-term.

Here are four to consider today, all no-load value mutual funds, and all with excellent ten-year records:

NameWeitz Partners
Value Fund
Legg Mason
Value Trust
Partners Fund
10-Year Compound
Annualized Return
Recent Price$20.89$48.65$89.22$26.47
Expense Ratio1.13%1.69%1.04%.94%

The annual compound total return average on an equal investment in each of the above funds over the past ten years would have been 17.80%. (Compare with 13.16% for the Vanguard 500 Index Fund during the same period.) A $10,000 investment at the outset in each of the four ($40,000 total) would have become $205,832 if all dividends and capital gains were reinvested and the assets were left in an IRA or other tax-deferred account. The funds' returns would also have been achieved with lower than average risk of loss in down markets.

Finally, one could do much worse than to purchase shares of Berkshire Hathaway (recent class B share price $2352). While it may appear to be overvalued, with a price to book value of 1.87 and a high P/E, this asset, over almost any five-year period since 1965, the first full year after Warren Buffett took over the company, has shown a terrific price appreciation. The book value (per "Yahoo! Finance," book value defined as common shareholders' equity [amount by which assets exceed liabilities] divided by the number of common shares outstanding [normally as of the end of the most recent quarter]) of this holding company for the entire period, 1965 through 2001, has increased at a compound annual rate of 22.6%. Despite the vagaries of the market, the price of a share of BRK/A increased at a compounded annual rate of 23.58% over the past decade, based on the median share price in 1991 through that in 2001.

Unfortunately, we are unlikely to see sterling returns such as those cited above again soon. As always, prior performance is no guarantee of future results. In addition, several analysts point out that, even after recent declines in U.S. stock markets, they are still highly overvalued compared with several fundamental measures. So our recommended assets would be doing well to simply exceed the major market averages for the next several years.

In a speech in July, 2001, Warren Buffett, as quoted by "Fortune," in its December 10, 2001 article, "Warren Buffett on the Stock Market," indicated the recent value of U.S. stocks compared with our gross national product is quite high by historical standards, probably higher than just before the 1929 crash that ushered in the Great Depression. While he does not forecast another debacle of that magnitude, his assessment is that, after commissions and fees, average equity returns for the next 10-20 years are not likely to be much over half what they were in the last decade. All the more reason, in our opinion, to choose the very best money managers for one's hard-earned savings and investments.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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