Wednesday, August 31, 2011

Investors buy shares for reasons not based on value!

The elation of trading. Warren Buffett defines it as one of the ironies of the stock market. It does not like high volume of trade for his Berkshire.

In equity markets the very high trading volumes are considered an asset, and efficiency index.
In his way of thinking, but Warren Buffett says that “One of the ironies of the stock market is the emphasis of the activity.”

To follow his motives, it should be noted that according to Buffett’s decision to buy the shares must be an argument derived from assessments of the validity of the business in which the company operates, the balance sheet and prospects for the future. Until these arguments have reason to be, there is no reason to exit the investment.

This is an opinion that can not be changed overnight, it has been well thought out. So people who have adopted this principle of evaluation are subject that will keep the shares in the portfolio for the long term.

On the other side, investors that buy for reasons not based on value, probably will sell for reasons not based on value. This type of investors (speculators) are a majority on the market. The result is the accentuation of erratic price movements unrelated to the underlying business developments.

Another aspect, not least, to the amount of money that investors must pay commissions for stock trading. Already in 1983, Buffett was estimated that during the previous year the total amount of the account for commissions for the sale was almost comparable to the sum of net profits of Exxon,
General Motors, Mobil and Texaco, then the first 4 companies list Fortune 500. The net assets of these four companies at the end of 1982 amounted to about 12% of the entire Fortune 500.

So to satisfy this tendency to “flip-flopping financial” investors as a whole each year are willing to pay such substantial sums in the form of that which can be considered as an extra-fee.

To conclude this discussion, Buffett says, “This costly activity will decide who eats the cake, but not enlarged.

The shares of Berkshire Hathaway, the investment vehicle of Warren Buffett, at current prices costs about $ 70,000 each. A Buffett was asked repeatedly to do a “split” stock to make actions more manageable, but he has refused.

Except for actions to create the type “B”, a nominal value of 1 / 30 of Class “A”, (current price around $ 2333 each). The aim was to allow even a less affluent investors to enter a shareholder of the company, but are anchored in a certain way upon class “A”, having a par value of 1 / 30.

The reasons for this rejection, says Buffett, is one of the objectives of Berkshire is to keep the price of the stock market rationally related to the intrinsic value of the company.

The key to rational pricing of shares is to have rational action. With its Communication, the Berkshire seeks to attract shareholders who are in tune with his thinking. Without prejudice to their right to exit from the investment, the intention must be to stay for the long term.

Implement a stock split may increase the volume of trade, but would not go in that direction. The new shareholders would not be attracted only by the split in the spirit of society, and would ultimately increase the volatility of the stock.

By type of investor behavior, “manic-depressive” in the market prices from time to appear inconsistent. For the investor this can lead to good opportunities to buy (or sell), but for “his” Berkshire Buffett prefers to avoid such oscillations.

Generally, managers of large companies are moving to increase trade on their titles. In this regard it is important to consider that the high volume of trade is true that there are many people who have decided to buy the shares, as much as there is a correspondingly large number of people who have decided to leave the company.

It may be a trivial consideration, it can lead to wonder why so many people have decided to sell? Perhaps they no longer believe in the society in which they invested? Generally the answer is that this is speculation.

Buffett is investing, not speculating. So the excitement of trading volumes can not be to his liking.
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