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Who Pushed the Panic Button?

| August 26, 2015
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Monday gave us a chance to put some cash to work.  As always when we see heavy volatility and panic, if we can take advantage of Mr. Market’s mood swings, we tend to be much better off.

We were able to put some cash to work and move out of some bond holdings yesterday and buy a few things at discount prices. Between 9:30 and 9:45 on Monday we saw some excessive selling.  We were unable to get the lowest prices of the day, but we were able to get good prices nonetheless. We would not be surprised to see the markets sell off again next month after investors start to receive their statements, but it looks like we saw the highest volatility day of the year yesterday.

Calvin Sneed was a fly on the wall in our office for much of the morning.  Being under the microscope for a couple of hours in this case was actually pretty fun. He ran a story on the news last night that many of you may be interested to view.  The link is below: 

What to do when the Dow Plunges 1000 Points


Warren Buffett


In May 1984, Warren Buffett laid out everything you need to know about his investing philosophy.

In a speech at Columbia Business School, later adapted into an essay, Buffett introduced what he called, "The Superinvestors of Graham-and-Doddsville."

Buffett writes:

"The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in that market."

And that's pretty much it: Buffett doesn't think about buying a stock; he thinks about buying a business. 

Following the chaos in markets seen on Monday — when the Dow fell as many as 1,000 points before snapping back to nearly unchanged — this longer-term view on valuing companies based on their business, not the price of their stock, is worth keeping in mind. 


Benjamin Graham

The essay's title "Graham-and-Doddsville" comes from Benjamin Graham — who Buffett studied under at Columbia — and Dave Dodd, with whom Graham literally wrote the book on security analysis. In Buffett's essay, he asks readers to consider a group of investors who outperformed the S&P 500 year in and year out.

"In this group of successful investors that I want to consider," Buffett writes, "there has been a common intellectual patriarch, Ben Graham ... They have gone to different places and bought and sold different stocks and companies, yet they have a combined record that simply can't be explained by random chance."

Buffett explains that the investors of Graham-and-Doddsville don't care when they buy stocks, or worry about a stock's beta or the "covariance in returns among securities." 

Buffett argues that these investors are businessmen buying pieces of businesses, not traders buying stocks. 

And the strategy seems to be working out OK: On Monday, Class A shares of Buffett's Berkshire Hathaway were trading right around $200,000, and $1,000 invested with Buffett in 1984 would've been worth $155,301.

(Over the last year, however, Berkshire stock is down about 1% against a roughly 2.5% decline for the S&P 500.)

Since 1969, the book value of Berkshire Hathaway — which Buffett acquired in 1964 — has beaten the S&P 500 44 out of 45 years on a five-year rolling basis. Said more simply, the relative value of Berkshire Hathaway shares have been worth more than the S&P 500 collectively every year but one. 

Last year, we featured a chapter from Cullen Roche's book "Pragmatic Capitalism" which debunked the myth that "you too" can be like Buffett. You can't, of course. But Roche's point isn't that Buffett's ideas about investing aren't sound, just misunderstood.

Many think Buffett is a simple "buy and hold" stock investor, but his investing is about way more than that — or way less, depending on how you look at it. 


Warren Buffett


Because on the one hand, Buffett's recent deal to acquire aerospace components maker Precision Castparts for $37 billion dollars earlier this month is something almost no one else on the planet can afford to do.

On the other hand, this is an unsexy purchase that amounts to buying a big, boring, profitable company at a discount — something Buffett would probably argue is easy to do for informed, curious, and diligent investors. 

Buffett concludes his essay by writing that some may wonder why he is giving away this basic investment philosophy, or what to some people's minds might be "secret."

"I can only tell you that the secret has been out for 50 years," Buffett writes, "...yet I have seen no trend toward value investing in the 35 years I've practiced it."

Buffett adds: "There seems to be some perverse human characteristic that likes to make easy things difficult. The academic world, if anything, has actually backed away from the teaching of value investing over the last 30 years. It's likely to stay that way. Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper."


Data as of 8/21/2015


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Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Franklin Wealth Management), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Franklin Wealth Management.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Franklin Wealth Management is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Franklin Wealth Management’s current written disclosure statement discussing our advisory services and fees is available for review upon request.  


Joe D. Franklin is President and Founder of Franklin Wealth Management.


Joe Franklin, CFP, is founder and president of Franklin Wealth Management, a registered investment advisory firm in Hixson, Tennessee. A 20-year industry veteran, he contributes guest articles for Money Magazine and authors the Franklin Backstage Pass blog.  Joe has also been featured in the Wall Street Journal, Kiplinger's Magazine, USA Today and other publications.











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