I don’t often speak of it, but Warren Buffett is a personal hero and idol of mine. I just love the guy’s story, and what he’s been able to accomplish is simply mind-boggling. I admire not just his fortune and investment prowess, but also his attitude and beliefs on life in general. Although my beliefs and ideas are my own, I felt like I found a kindred spirit after reading Buffett’s biography. He’s extremely witty, funny, and approachable in a way not often synonymous with one of the richest people the world has ever known. His intelligence is already well documented, but the way in which he conveys and shares that intelligence is refreshing and wonderful.
In light of that, I look forward to the annual shareholder letters that Buffett pens to Berkshire Hathaway Inc. (BRK.B) shareholders. It’s a glimpse into not just the business acumen of Buffett, but his down-to-earth investment advice.
So I recently took it upon myself to read through the newest iteration of Warren Buffett’s annual shareholder letter. As always, it’s a classic.
There’s plenty of great material within the pages, and much of it relates to dealings within the Berkshire umbrella, including: subsidiaries’ performance, acquisitions, the long-term performance of the company, a review of common stock positions, and a major lesson on how insurance companies use the float to their advantage.
But since I’m not a shareholder in BRK.B, what I was most excited about was the slew of timeless investment advice that was sure to be included. And this year’s letter was no letdown. It seems Buffett is as wise today as he ever was. The Oracle shows no signs of slowing down.
The broader investment advice starts on page 17, and I’m going to highlight his five major points below:
- “You don’t need to be an expert in order to achieve satisfactory investment returns.”
I couldn’t agree more. I’m no expert, yet I’ve built a portfolio from seed money of $5,000 into what is now in the mid-six-figures.
You don’t need to be an expert to invest intelligently as long as you understand your strengths and weaknesses, and invest accordingly. For instance, I don’t understand all the complexities that exist with technology companies. As such, I purposely keep my exposure there low.
It doesn’t take a genius to take a look around and look at what people are buying and using every single day. I invest in companies like The Coca-Cola Company (KO), The Procter & Gamble Company (PG) and Chevron Corporation (CVX) because I see people every single day drink assorted beverages, brush their teeth, and put gas in their cars. You don’t need to figure out the next trend in biotechnology to have solid long-term returns while receiving a rising income source in the meanwhile.
- “Focus on the future productivity of the asset you are considering.”
Genius in its simplicity and truth.
When I invest in major blue chip companies I do so because I’m anticipating that they’re going to sell more products and/or services in the future than they are today. And I also anticipate that they’re going to share a piece of their expanding profit pie with me as a shareholder.
If you’re unsure as to whether a company is going to be more productive for the foreseeable future than they have been in the recent past then why invest at all? While forecasting future growth rates is exceedingly difficult, it’s fairly easy to look at 10 years of data and extrapolate that out. Furthermore, one would always be wise and prudent to seek a margin of safety after even conservative growth rates.
And when I’m monitoring the performance of companies within my portfolio, or perspective investments, I don’t place too much emphasis on a particular quarterly earnings report. However, if years of suboptimal growth occur with no reasonable explanation then at that time it may be wise to reconsider that investment.
- “If you instead focus on the prospective price change of a contemplated purchase, you are speculating.”
This follows up on the last point. It’s really fantastic advice, and harkens back to Benjamin Graham.
There are quite a few stocks within my own portfolio that have either doubled in price or are close to it: Phillips 66 (PSX), Harris Corporation (HRS), and Raytheon Company (RTN), among others. But I’m not a seller here, because that would be speculating, not investing. I invest in a company because I want to be a long-term partner in the operations and share in future profits. Trading in and out of positions based on price action is nothing but speculation.
Furthermore, I always focus on valuation. Just because a stock doubles or triples has nothing to do with the value of the underlying business. What Mr. Market is willing to sell or pay for a piece of a business doesn’t necessarily have anything to do with what that slice of equity might actually be worth. If a current valuation makes sense, the future growth is still reasonable, and the company continues to treat me right as a shareholder, then why in the world would I sell?
- “Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.”
This is a follow-up to the previous points. Looking at prices alone and worrying about what Mr. Market is willing to pay for your equity positions will blind you from where the real action is at: the long-term performance of the underlying companies.
You can’t acheive satisfactory returns if you’re constantly trying to guess what a stock’s price will rise or fall to, or continue to trade in and out of stocks based on what the stock market is telling you they’re worth. The only party who can reliably profit from such actions would be the the broker who facilitates the transactions. Spend less time looking at stock prices and more time looking at annual reports. You can thank me later.
- “Forming macro opinions or listening to the macro or market predictions of others is a waste of time.”
Again, I couldn’t agree more. I discussed this point a while ago when I recommended investors ignore the noise. And what is noise? Noise is everything out there that could possibly distract you from how a company is actually performing. The television is noise. The newspaper is noise. Predictions, charts, and job reports are all noise. I try to make sure my blog isn’t noise, and that’s why you never see me discuss topics like the general economy, interest rates, what’s going on in China, etc.
As Warren Buffett points out numerous times in the letter, the one thing that isn’t noise is that American businesses, in aggregate, will almost surely be more productive and more valuable over the next few decades than they are today. There’s going to be more people on this planet consuming more food, energy, toothpaste, and medicine. And that’s why you see the bulk of my portfolio invested in US multinationals selling such products like Johnson & Johnson (JNJ) and McDonald’s Corporation (MCD).
Worrying about interest rate changes or border clashes halfway across the planet will only distract and blind you from all you really need to know. The world will continue spinning tomorrow and the next day, and as long as that fact is agreed upon then it should surely be agreed that there is going to be a continued need for the products and/or services that the world wants and/or needs.
Timless and classic. I know that Buffett won’t be around forever, but I feel privileged that I started investing while he was still alive and in his prime. It’s amazing to me that the world’s greatest investor can be so easy to understand and emulate. The only unfortunate part of reading through this year’s shareholder letter is that I now have to wait a year until the next letter comes out!
Full Disclosure: Long KO, PG, CVX, PSX, HRS, RTN, JNJ, MCD
How about you? Do you agree with Buffett’s advice? Think it’s timeless?
Thanks for reading.
Photo Credit: DonkeyHotey via Flickr
Edit: Corrected fourth quote