Day tradingBuffett U
I watched a television special about Warren Buffett over the weekend on Fox Business called Buffett U. Warren Buffett hosted a question and answer session with business school students from all over the country. The students were allowed to ask Buffett questions about any topic that they wished. I found one of Buffett’s comments particularly interesting.
Buffett explained his investment philosophy as a young investor. He stated that he always believed in investing in great companies at discounted prices. But he was a much more active investor when he was younger. Buffett explained that he began with only $9800 so he would have to sell one investment in order to purchase a better investment. If he had invested in a company selling for 80 cents on the dollar then he would sell his investment to purchase a company trading at 60 cents on a dollar.
This is intriguing because this differs from the buy and hold forever Buffett of the latter years. I am not trying to suggest that Warren Buffett was daytrading stocks. But he was selling cheap stocks to purchase cheaper stocks. I think that this illustrates that when you are investing small amounts of capital; you have to always seek the greatest return on capital. This may mean selling a good investment idea for a great one.
For example, let’s say you had about $25,000 to invest. You bought 1000 shares of American Express(AXP) at $23 per share because you believe that AXP has an intrinsic value of $30 per share. This equates to a $7 per share potential gain and a 23% profit. A few months later when American Express is trading at $25, you notice that Best Buy is selling at $20 per share. You believe however that Best Buy has an intrinsic value of $35 per share. This represents a $15 per share gain and a 43% profit. You can see that the most profitable move is to buy Best Buy despite the fact that you didn’t receive the full value for American Express.
Buffett is now rich enough that he no longer needs to sell one opportunity to recognize another. If you are not quite as rich as Buffett (like me) and want to maximize returns with less money then consider these tips. Always set an intrinsic value for an investment and aim to realize that value. Be flexible. If a more attractive opportunity presents itself then adapt your investment strategy.