It’s tough to argue with one of the most legendary investors of all time, but Paul Merriman (founder of Seattle-based Merriman Wealth Management) apparently takes exception with some of Warren Buffett’s principles, particularly as they relate to investors in retirement. In a recent MarketWatch article, Merriman outlines his interpretations and gripes with seven Buffett principles:
Hold plenty of cash to withstand financial challenges and don’t be afraid to use it for “lucrative investment opportunities.” According to Merriman, this smacks of an encouragement toward market timing, and he questions how the gray-haired investor community would be able to identify bargains.
The boring companies are often the best in their business and can provide excellent long-term returns. Index funds rather than individual stocks, says Merriman, are the better option for investors who want to take advantage of “boring” value stocks.
Look for top-brand companies that control prices. Buffett sings the praises of Coca-Cola, arguing that by charging more for essentially the same products as its competitors the company makes money for investors. Instead of putting money into this type of individual stock, Merriman contends that investors should own “hundreds of well-known growth stocks through index funds that give you rewards while reducing your risk.”
Minimize your mistakes and learn from those you make. Merriman asserts, “The real mistake to guard against is the belief that you will do better than the market by picking and choosing stocks.”
Never overpay. While Merriman agrees with the concept in principle, he adds “I don’t think individual investors have any business trying to recognize undervalued companies and determine when they should buy and sell. To buy value companies, use index funds.”
Buy and hold. Again, Merriman upholds the idea, but believes that Buffet’s advice could be construed as encouragement to buy when a stock is going up and sell when the trend stops. Every buy and sell decision, according to Merriman, “is likely to seem ‘smart’ at the time you make it. Only later will you discover whether it was smart or dumb. This is not buying and holding.”
Stick with what you know. The problem with this notion, says Merriman, is that individual investors rarely have the insight that full-time institutional investors might. “One thing you should ‘know’ about investing,” he asserts, “is that you cannot know enough to outsmart the markets.”