Thursday, August 30, 2012

Am I a Trader?

The other day I saw this article which said that Warren Buffett is not a long term investor. It claims he is just looking for a good trade. I disagree with the article. A trader to me is a person who bets against another person on the price of a security, typically another trader. A trader puts less weight on the underlying value of the security in their decision making. You can spot a trader from his phrases like:  "risk on risk off periods", "stay out of the market until the dust settles".

A value investor like Buffett doesn't think about what the market is doing; he just cares about the fundamentals of his security relative to the price. Buffett has said many times that he doesn't care if the market closes for a year. He buys his investments because he expects them to be profitable as investments, not as trades. Many people misunderstand his turnover (trading frequency) as a sign that he is not a long term investor. Buffett is a value investor, he will go wherever there is value. If he sees a great value he would use his cash or sell his least desirable investment and use the proceeds to buy that great value. So would I. So a value investor can do a lot of trades. It isn't likely but it can happen.

As a example of value trading, I have traded Cisco (CSCO) often for the last 4 years. CSCO is the world's dominate networking gear maker, I have owned it since the high flying dotcom bubble. Since then its shares have gone from $82 to about $19 today. It has a P/E of 14. And it is still a growth company with wonderful margines. Sure, gone are the days when high-tech had all the glamour. But these days people forget that high tech companies credit for their growth. And the P/E of 14 is even more impressive if you consider Cisco's balance sheet. Cisco has a net-net of $5 a share. Net-net is the equity on the balance sheet if you valued all intangibles and fixed assets at zero. Therefore the $5 per share is money back to the shareholder. If you subtract that out of the stock price you get a P/E of 10!

CSCO right now at $19 would appear to be a great buy, but just imagine that a month ago it was $15. I decided $15 was too good to pass up and bought. In fact, in general I have used this reasoning to buy CSCO at below $19 and to sell above that since the fall of 2008. The following table shows my CSCO trades in the last 4 years.

Date No. of Shares Share price Net stock position Net cash position
Initial reference 0 0
11/12/08 bought 750 16.8 750 -12600
08/11/09 sold 750 22.3 0 4125
03/23/10 sold 120 26.7 -120 7329
04/07/10 sold 125 26.5 -245 10641.5
04/12/10 sold 150 26.5 -395 14616.5
04/12/10 sold 125 26.4 -520 17916.5
04/20/10 sold 125 27.3 -645 21329
04/23/10 sold 150 27.5 -795 25454
12/07/10 bought 130 19.17 -665 22961.9
02/10/11 bought 550 18.93 -115 12550.4
03/11/11 bought 500 17.81 385 3645.4
03/15/11 bought 505 17.44 890 -5161.8
04/11/11 bought 550 17.5 1440 -14786.8
06/07/11 bought 450 15.9 1890 -21941.8
08/08/11 bought 500 14.3 2390 -29091.8
10/27/11 sold 500 18.48 1890 -19851.8
11/07/11 sold 435 19.88 1455 -11204
07/25/12 bought 800 15.1 2255 -23284
08/28/12 sold 800 19.2 1455 -7924
If later I sell remainder 1455 19.1 0 19866.5

Note I said I traded CSCO often, for traders that may not seem like a lot, but it is for me! The second last column show how much is my stock position from the trades. The last column shows how much cash I have spent (if it is negative) or how much I have gained (if it is positive). Right now from the last 4 years I have 1455 shares. The last row shows that if I closed out these CSCO trades tomorrow, the result of all these trades would be a $19,866.50 gain.

I put the table here to show that at I tend to buy when the shares dip below $19. It is just too good a value then. When it is above $19 it is still a good value but I do want limit my exposure so I sell some. The higher it rises above $19 the more I want to reduce my position to the point where I would completely sell everything at some point in the high $20's. I don't call myself a trader because I do this, I feel I am a value investor who trades CSCO frequently.

Disclosure: In addition to the shares I own in the table, I also own some shares as leftovers from my purchases during the dotcom bubble. I ignored those old shares from the discussion.

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