Last post I wrote about the necessity to trade if the big guys are getting out, and waiting until they get back in to come back in ourselves. And I also said there is another way to go. You can create a BERKY.
A BERKY is a kind of Berkshire Hathaway -- the investment account/company that Warren Buffett uses to hold cash while he’s thinking up something to invest in.
Mr. Buffett’s Berky is an incredibly important part of his investing strategy. It's what allows him to accept the downs of the market. With his Berky, he has the luxury to take a long view. He can buy into a business even while the news is horrible and the stock is going down like a brick, because he knows that if it keeps going down, his Berky will provide him with more cash to use to buy in at the lower prices -- and he can keep on buying as long the price keeps on going down.Thinking Like Mr. Buffett
Warren Buffett says that the understanding that you are a consumer of investments is critical to good investing. He puts its like this: Say you are a hamburger consumer. Do you like it better when the price of hamburgers goes up or down?
Well, if you think of yourself as a person who buys one hamburger and then hopes to sell it later for more than you paid for it, you hope the price goes up.
But Mr. Buffett isn’t like that. His Berky turns him into a hamburger consumer. Why? Because his Berky is not holding on to the burger to sell it later. Selling would only create problems of what to do with the money.
Mr. Buffett already has money. In fact, his Berky is a constantly replenishing well-spring of money. It fills up with money over time, and his main problem is what to consume with it. His Berky is his business, and since his Berky keeps filling up with money, his job is the consumption of businesses to get rid of the money that’s in the Berky.
How’d you like that problem?
Well, as I’ll discuss with you in a future post, you are quite able to create that "problem" for yourself, and I’ll show you how. But for right now I want to show you the power of a Berky to keep your head screwed on straight in a down market.How a Berky Can Keep You Sane
Because he has a Berky, Mr. Buffett can deal with future price drops psychologically with no problem.
Because he has a Berky, he
treats a price drop as an opportunity to spend that Berky cash. And so can you.
Here’s how that works:
Let’s say Mr. Buffett is a buyer of GARMIN today at $43.
That means he’s done his homework and loves the business (He doesn’t because it's technology that can be replaced, and therefore is unpredictable in the long term.), and thinks that it has a value of $150 and therefore is a steal at $43.
But in the next months the stock price goes down to $33. Meanwhile, his Berky is filling up with cash.
Since he already has a decision that Garmin was a steal at $43, it's obvious that it is even more a steal at $33.
This is old school, pre-internet, pre-tools style investing, and it works. If you did your homework and you know that Garmin (or whoever) is a wonderful business and that $43 is a wonderful price, then $33 is even massively more wonderful.
If Mr. Market would be kind enough to sell Garmin to you for $10 a share, the price would be so insanely wonderful that you’d be jumping up and down like a crazy person.
Well, you would be if you have a Berky that is replenishing the cash constantly, because then you would have the cash available to buy more and more and more of Garmin as the price goes down and down and down.
The lower it goes, the more of it you get per dollar invested, and the happier you are.Buffett's Secret Weapon for Investing
Mr. Buffett set up Berkshire to be a cash collection agency, a piggy bank, and an investment account that will collect cash from the businesses that he owns and hold that cash until he finds something else to consume... something else that will produce ever more cash that needs to be consumed. And so it goes.
This is really Buffett's biggest secret weapon for investing: that he has a source of cash flow to invest that consistently puts more cash in his hands.
This is what gives him the confidence to pull the trigger at a given time. He knows that if the stock price goes down more, he has the cash to take advantage.Why Having a Berky Makes Price Drops OK
If you have this sort of a deal set up, then yes, it is wonderful that Garmin went from $43 to $10, because you have a never-ending supply of cash to invest at these ever lower prices.
This single fact lets you rejoice, even while you are getting hammered on your earlier purchases at $43 -- simply because your new $10 investments are getting you so many shares that your ownership percentage is overwhelming the size of your earlier $43 investments.
That makes the paper losses you are taking on your earlier purchases seem paltry compared to the potential you have of future gains from the $10 purchases.
Consider how cool it is to think like this:
Imagine you negotiate with someone to buy a bunch of town houses that are worth $150,000. You get the price set per town house at $43,000 because real estate is just unsellable right in that area. Wow. Super deal.
Now imagine that three months later, the person you made the deal with is insisting that you pay $33,000 per town house. He won’t take $43,000.
And a few months after that, he will only take $10,000 per town house. Hey, you’d be okay with that, right? In fact, you’d think the person was insane.
And that is exactly how Mr. Buffett sees Mr. Market -- insane, from time to time. And so he proceeds to take advantage because he has a Berky. And so can you.
In the next post I'll explain how to set up your own personal Berky cash collection device.
Now go play.