The Best Place to Look for New Investments

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Former NBA player and coach Pat Riley has seen it all.

He came into the league playing with Wilt Chamberlin and Jerry West.

The former is one of the greatest centres to ever lace up. The latter became the logo of the NBA.

Riley also coached Magic Johnson and Kareem Abdul-Jabbar, who would go on to win five NBA Championships together.

He was on the other end of Michael Jordan and the Bulls more than a few times. Riley was also at the helm of Miami when Lebron James won his first title.

There are few that have seen more on the basketball court than Riley over a lifetime.

One of his most memorable quotes was…

If I had to choose a player to take a final shot to win a game, I’d choose [Michael] Jordan, but if I could pick one to shoot to save my life I would pick [Larry] Bird.

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Pudgy white guys make things easy

If you’re unfamiliar with the name, Larry is a six-foot-nine, unathletic, lunch bucket white guy.

One look at Larry and you’d never know he was an NBA superstar.

So, why let Larry take the shot over the greatest player ever?

Because Larry makes things easy for himself. He plays to his strengths. He gets his teammates involved and he has supreme confidence in what he can do on the court.

Jordan is so magnificent, he can do everything. He makes tough shots. He can take over a game by himself.

If I can use another sporting analogy, Jordan tries to leap over eight-foot bars (and often does), whereas Larry steps over one-foot bars.

Larry makes the game easier for himself and his team. Jordan does the impossible.

So, who do you want to take the shot for your life? The guy that tries to pull off the impossible or the guy who will get into a position where he has an easy shot?

Now, dear reader, let me pose a similar question but in the world of investing.

Who would you like to pick the only investment you’ll ever make for you?

Surely you want someone like Larry? Someone who’s going to make things easy for themselves and not difficult.

Another pudgy, yet shorter white guy comes to mind.

The Oracle of Omaha.

I don’t think anyone would pass up a recommendation from Warren Buffett himself.

Not only does he have an amazing long-term track record, he’s confident in what he knows and sticks to those pockets of the market.

Over the weekend, however, Warren lost a bit of investment cred as Berkshire Hathaway Inc [NYSE:BRK] reported its lowest annual profit since 2001.

In his letter to shareholders, Warren warned of further profit declines to come. The Australian Financial Review (AFR) reports:

Record-breaking investor and Berkshire Hathaway CEO Warren Buffett released his yearly letter on Saturday US time, and in it he warned about the prospect of “The Big One” – a major hurricane, earthquake, or cyber attack that he said “will dwarf hurricanes Katrina and Michael”.

“When such a megacatastrophe strikes, we will get our share of the losses and they will be big – very big,” Buffett wrote.

Although such a disaster could happen tomorrow or decades from now, one thing is sure, he said: the catastrophe is inevitable…

Part of the loss was due to Berkshire’s investment in Kraft Heinz Co [NASDAQ:KHC].

Again, from the AFR:

One of Buffett’s biggest positions, in packaged food giant Kraft Heinz, suffered a spectacular 30 per cent share price decline after it made a host of horror revelations. That included a dividend cut, a monster write-down and a regulatory investigation.

Kraft Heinz, along with other consumer staples stocks, has been under pressure for some time as cost-conscious consumers shift towards cheaper private label brands while health-conscious consumers favour more natural food products.

Do a round of the mainstream and you’ll see people suggest Buffett has lost his touch. I saw some reports critique Buffett’s investment into Kraft Heinz, like they know better.

Of course Buffett is not God. Neither is Larry or Michael (as long as he’s not in basketball shoes).

Buffett is very open about his mistakes. He’s also very open about the very few predictions he gives. One of them is of the future returns Berkshire shareholders can expect.

Nothing extraordinary, but probably a point or two better than average. When have you ever seen an investment manager tell his clients that?

Warren also recently told shareholders he’s struggling to come up with new finds. The Oracle is looking for elephants to buy. But high make prices are seriously limiting his options.

That’s not the case for you, though.

Why small-caps are the answer

Unlike Buffett, you don’t have hundreds of billions to put to work.

Buffett’s investment universe, because of his cash pools, is tiny. Yours, on the other hand, is massive.

You’re not restricted to the largest 300 names. And in fact, it would probably be better if you didn’t look at them.

You can go into the smaller end of the market, where the businesses are simpler and there’s less investor competition.

Even if Buffett is wrong on Kraft Heinz, do you really want to bet against the Oracle on his next investment? The same goes for any billion-dollar fund chocked full of specialising analysts, who have years of experience.

Why try to compete with the experts when there is an uncrowded pool full of fish? Like Larry, make things easier for yourself.

Look for small-cap opportunities.

Your friend,

Harje Ronngard,
Editor, Money Morning

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