Is Buffett Washed Up?
Don’t Listen To Me, But Please, Hear Me Out: Part 7
There has been a flurry of criticism against my Guru, Warren Buffett in the past few days. Billionaire investors and stock pundits are saying Buffett lost the plot. They say, Buffet is a loser for hoarding cash, selling airline stocks and not going on a buying spree in the aftermath of the crash in March 2020.
I’ve closely followed crashes from 2001, 2008, and 2014 as well as studied the history of those that preceded them. I do not understand why the market has seemingly recovered so quickly when the fundamental underlying issues are not resolved. Are Day Traders really moving the market? Is Buffett’s era really over?
How to Prove Buffet Is Still Right?
To answer this, I did the following:
- First, I looked at 3 major market indexes: US, India and UK. I wanted to see what these indexes returned since the March 2020 crash. Did all markets recover equally? Is the recovery a US anomaly or is it global?
- Secondly, I analyzed the returns of 2 stocks, Amazon and Zoom Video Communications. Would my gains be more using Buffett’s buy and hold strategy? Or, could I have made more by using a strategy similar to that of a quasi-day-trader? In other words, what would happen if I tried a buy low, sell high strategy repeatedly? I would sell shares whenever my gains reached 20% or more. Conversely, I would buy the same stock whenever there was a reasonable dip in the stock price. I would repeat these transactions multiple times over a few years. Let’s look at the results.
Market Returns Since the crash on March 23 2020 Till June 9 2020
Chart above compares the market returns if I had in either the S&P 500 (USA), Bombay Stock Exchange (BSE, India), or the London Stock Exchange (FTSE, UK).
The red bars show the returns in each had I started investing on Jan 1 2020.
As you can see, the US stock market is almost flat to the year having wiped out nearly all the losses. Truly phenomenal.
The BSE & FTSE have also wiped out lot of the losses but are still significantly down for the year and -17,4% and -14.7% respectively.
The Blue bar shows the returns if I had invested on March 23, 2020 after the crash.
As you can see, the results are incomprehensible, at least for me.
All 3 markets from USA, India, and UK have had massive gains of 44%, 32% and 30% respectively. Remember, this gain is in a mere 2.5 months. For perspective, in the entire 2019 year, the S&P 500 returned 32% which in itself was phenomenal.
So, I am wondering if my sensei, Warren Buffett, really got it so wrong? The question to ponder is, are these growths sustainable or are we seeing another irrational bubble? I personally feel that with massive layoffs and countless small businesses that may file for bankruptcy, the fundamentals of the economy and the stock market are at a huge disconnect.
So let’s look at the point number 2.
Buy and Hold or Buy Low, Sell High in Quick Successions?
Case 1: AMAZON ($AMZN)
Scenario 1: Buy and Hold
The above chart shows Amazon’s stock price history over the past 5 years.
There was some dip in price around the second week of February 2016. So, let us say I invested $10,000 on February 16, 2016 at a price of $521.10 per share giving me 19.19 shares (I’ll assume my broker allows me to buy fractional shares).
On June 9, $AMZN closed at $2,600.86. This means my 19.19 shares is worth $39,901.96, making me pleased with my gain of 399%. If I don’t sell now, my unrealized gains are almost $30,000. Wahoo!
Scenario 2: Buy Low, Sell High in Quick Successions
Again, let us say I bought $AMZN shares on February 16, 2016 at $521.10 per share for an initial investment of $10,000. But now, I am going to sell every time I get a return of at least 20%. I will be mechanical about this and will not be emotional or greedy. As soon as the stock is up at least 20%, I’ll sell.
Looks like, I would not have had to wait much long. On April 19, 2016, just a little over a month since my investment, $AMZN is at $627.90 and I sell my shares giving me a tidy profit of $2,049.51 or 20.5%.
Now, I watch the stock and see if there’s another drop. As you can see from the chart, $AMZN is having a good run. But around Nov 2016, there is a bit of a drop, so I exercise my Buy Low strategy and purchase $10,000 worth of $AMZN stock at $719.07 and get 13.91 shares on Nov 14, 2016. On March 29, 2017, I sell these for $874.32 booking a profit of $2,159.04 or 21.59%.
Let’s say I keep repeating this buy low and sell high transactions until May 4, 2020. I am unable to buy $AMZN again as the stock price has not fallen much to trigger my Buy Low strategy. The table below shows all the trades I could have made.
As you can see, clearly in this case Buffett Strategy of buying and holding gets me a much higher gain of $24,826 versus $15,592 from continually buying and selling a stock. Of course, I am simplifying it because it really is hard to tell what the ideal “low” should be to buy a stock. A lot of analysis goes into such decisions if you want to be a professional trader.
But for the average investor like you and I, who wants to passively grow their wealth, Buy and Hold is still a solid strategy. If companies are giving dividends, then reinvest the dividends in the stock and you basically are getting free money to invest.
Perhaps $AMZN is not the ideal stock to prove or disprove the Buffett Way. It is not a highly volatile stock. So let’s now look at a volatile stock like Zoom Video Communications.
Case 2: ZOOM VIDEO COMMUNICATIONS ($ZM)
Zoom Video Communication ($ZM) has been the darling of the market during this pandemic. It is highly volatile returning 202% in gains since the beginning of the year. Day Traders love highly volatile stocks as they trade on the swings or volatility. So, let’s see if Buffett’s strategy fares well for $ZM.
Scenario 1: Buy and Hold
I started out buying $ZM in August 2019 when it looked like a good buying opportunity as its price had started to fall after the heady gains since its IPO in April 2019. See chart below.
On August 12, assume I invested $10,000 and bought 108.51 $ZM shares at $92.16 per share.
On June 9, $ZM closed at $205.43. This means my 108.51 shares are now worth $22,290.58, making me delighted with my gain of 123% in less than 1 year. If I don’t sell now, my unrealized gains are $12,290.58.
Scenario 2: Buy Low, Sell High in Quick Succession
Again, I will Sell as soon as I see gains of at least 20% and trigger a Buy anytime $ZM’s price falls below -5% from the last price at which I sold. On August 12, assume I invested $10,000 and bought 108.51 $ZM shares at $92.16 per share. On Feb 27, 2019, $ZM was at $113.55, so that I can sell to get a 23% gain. Since $ZM is volatile, I watch the market until price falls by -5% or more from the price at which I sold. In this case, the very next day, on Feb 28, 2020, $ZM price falls -8% to $105 and so I get to buy 95.24 shares for $10,000. On March 20, $ZM closes at $130.55 so that I sell to gain a 24% return. The complete trades until June 9 is given in the table below.
In this case, I didn’t get another buying opportunity as $ZM didn’t fall by -5% which is the trigger for me to buy. I may or may not get the opportunity to buy again as $ZM may or may not fall below $193.94 (or -5% of $204.15, the last price at which I sold $ZM).
Even with a volatile stock like $ZM, Buffett’s method of buying to hold yielded better returns of 123% as against 118% from constantly trading on highs and lows.
For the average investor who wants to build wealth at a steady pace with less daily anxiety, Buffett’s advice is still prudent. So long as the underlying fundamentals of the stock is good, you should buy when the price is low and hold on for at least 10 years or more.
If, however, you like the excitement and thrill of high intensity trading, then by all means become a Day Trader. Day Trading can be a high risk and high reward strategy. It is not for the faint of heart. You can read more about it here. But please realize that Day Trading is a Full-Time job. You must be in front of your computer monitors all day during market hours, constantly analyzing multiple charts, trading data and also pay attention to any news that’s relevant to the industry or the stocks you are trading. I read on Investopedia that Day Traders make money 60% of the time and lose 40% of the time. If you are good at it, you win big but limit your losses so that net-net you are in the money.
Let me end with a final chart to show how well $AMZN and $ZM investments would have done had we invested on Jan 1 2020 versus March 23 2020 after the crash. Interestingly, S&P500 beat both $AMZN and $ZM if investments were made after March 23, 2020.
Next few blogs, I will attempt to explain how to read a stock table and how to assess if the stock fundamentals are good.
If you would like to understand more, please feel free to reach me, on Twitter @saq3 or LinkedIn @Shaheeda Abdul Kader, or leave a message at say @shaheedasays.com. I’d be happy to offer you my services.
I am NOT a certified broker or financial advisor. Please DO NOT make investment decisions based solely on my blogs. My intention is to show you how to research stocks or funds for yourself so you can feel empowered and knowledgeable to do your own investigations and invest with confidence. It is best to consult with your broker or advisor if you have questions. You can also reach me and I’ll do my best to help you with your queries.