Warren Buffett published his 2018 letter to shareholders on 23 February 2018. While his letters are getting shorter and are more facts and figures than before, there is still plenty of good advice in there. It was also good to read that a lot of his principles are part of Bluewater’s investment philosophy too.
Our prime goal is the deployment of your capital: to buy ably-managed businesses, in whole or part, that possess favourable and durable economic characteristics. We also need to make these purchases at sensible prices.
There is always the “next big thing” when it comes to investments. Add in the fear of missing out, we have seen people throwing money into investments such as Bitcoin in recent times and lost a lot of money. If you buy into quality companies at a good price, while they may fall in value in the short term, they will be profitable in the long term.
My expectation of more stock purchases is not a market call. Charlie and I have no idea as to how stocks will behave in a week or next year. Predictions of that sort have never been a part of our activities. Out thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price.
Don’t not try to predict where markets are going to be in the future. I have lost count of the people who told me a correction was coming. The basis for their prediction? There’s one every 7-8 years. But we know that markets don’t have patterns. So, if it is a good quality stock at a good price, it will make you money in the long run.
Berkshire’s value is maximised by our having assembled the five groves into a single entity. At Berkshire, the whole is greater – considerably greater – than the sum of the parts.
There are also many other countries around the world that have bright futures. Americans will be both more prosperous and safer if all nations thrive. At Berkshire, we hope to invest significant sums across borders.
Berkshire Hathaway is no ordinary company, it owns multiple business and large parts of many more (They own over 5.4% of Apple and 9.8% of Wells Fargo, absolutely huge companies). Owing multiple businesses in different industries has made them stronger.
A bit of a swipe at Trump’s America first approach and to us all. The stronger we make poorer countries, the better we all do and the more secure we all are.
We use debt sparingly. Many managers, it should be noted, will disagree with this policy, arguing that debt juices the returns of equity owners. And these more venturesome CEOs will be right most of the time.
At rare and unpredictable intervals, however, credit vanishes and debt becomes financially fatal. A Russian roulette equations – usually win, occasionally die – may make financial sense for someone who gets a piece of a company’s upside but does not share in its downside. But that strategy would be madness for Berkshire. Rational people don’t risk what they have and need for what they don’t have and don’t need.
People can be too eager to take on debt. Look at the Irish obsession with property and their willingness to take on debt to be repaid over decades. Too much debt and a change in the economic environment can ruin you. Given there’s a downturn every 7-8 years :), there’ll be 3 times during a 25 year mortgage that you will face financially ruin. Like those odds?
Our level of equity capital is a different story: Berkshire’s £349 billion is unmatched in corporate America. By retaining all earnings for a very long time, and allowing compound interest to work its magic, we have amassed funds that have enabled us to purchase and develop the valuable groves earlier described. Have we instead followed a 100% payout policy, we would still be working with a $22 million with which we began fiscal 1965.
If my $114.75 had been invested in a no fee S&P 500 index fund, and all dividends has been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before printing this letter). That is a gain of 5,288 for 1.
To “protect” yourself, you might have eschewed stocks and opted instead to buy 3 1/4 ounces of gold with your $114.75. You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business.
An example of the power of compounding. It is important to be aware that compounding shows its real power over a long period of time and not in short periods. You can see the contrast in the value of gold over that same period. There is no compounding with gold at it doesn’t produce a dividend. That is why we don’t recommend metals, crypto or commodities. You can hold all the gold in the world but you will only make your money back when you sell it. With equities, property, bonds and cash, you will earn money while you hold the asset.
On occasion, a ridiculously-high purchase price for a given stock will cause a splendid business to become a poor investment – if not permanently, at least for a painfully long period. Over time, however, investment performance converges with business performance.
There will be times when investors buy at the top of the market. If there is a fall in market prices, it may look like a bad investment for a while. But if it is a quality investment (if it is a bad investment, you need to recognise that and cut your losses), it will come good, if given time.
If you have any questions, send me an email at steven@bluewaterfp.ie