I started writing this blog in July 2013. It is very fitting that the 300th article is on on a topic that I have written about in each of those years. I would like to thank everyone who has read my blogs and found some benefit from them. If there is any topic you would like me to write about, send me an email at steven@bluewaterfp.ie . Now on with this weeks article.
Warren Buffett published his 2019 letter to shareholders on 22 February . Both Buffett (89) and his partner, Charlie Munger (96) are still turning up for work, something that would put a lot of us to shame. In this years letter, Buffett repeats past messages on investing, showing that we should listen to the world’s most successful investor.
Over time, Charlie and I expect our equity holdings – as a group – to deliver major gains, albeit in an unpredictable and highly irregular manner.
Too often we expect our investments to go up in a straight line. It doesn’t work that way and we have to live with the good as well as the bad. But if you invest in quality, you will make money in the long term.
Buffett references a book written by Edgar Lawrence Smith in 1924 called Common Stocks as Long Term Investments.
For the crux of Smith’s insight, I will quote an early reviewer of his book, none other than John Maynard Keynes: “I have kept until last what is perhaps Mr. Smith’s most important, and certainly his most novel point. Well managed industrial companies do not, as a rule, distribute to the shareholders the whole of their earned profits. In good years, if not in all years, they retain part of their profits and put them back into the business. Thus there is an element of compound interest operating in favour of a sound industrial investment. Over a period of years, the real value of the property of a sound industrial is increasing at compound interest, quite apart from the dividends paid out to shareholders.
Buffett is emphasising the benefit of reinvesting back into a company and how the compounding effect will increase your overall wealth.
We constantly seek to buy businesses that meet three criteria:
He also quotes Tom Murphy, a director at Berkshire, “to achieve a reputation as a good manager, just be sure you buy a good business.”
Again, Buffett is emphasising the need to buy quality at a good price. He also admits that he has made mistakes and some have been a disaster. If the world’s most successful investor, with all the research tools available to him makes mistakes on investments, it shows that investing is not an exact science. But that doesn’t mean luck is a good strategy either. Do not invest in individual stock unless you have done thorough research yourself. Brand recognition doesn’t count. If you don’t know how to research a company or what any of the figures means, just buy an index instead.
What we can say is that if something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, is is almost certain that equities will over time perform far better than long-term, fixed rate debt instruments.
That rosy prediction comes with a warning: Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market, perhaps 50% magnitude or even greater. But the combination of The American Tailwind, about which I wrote last year , and the compounding wonders described by Mr. Smith, will make equities the much better long-term choice for the individual who does not use borrowed money and who can control his or her emotions. Others? Beware.
Again, Buffett is emphasising a need for a disciplined investment approach. Invest in quality, don’t borrow and don’t get carried away in either the good or bad times. He emphasised this earlier in his letter when talking about his insurance business
Disciplined risk evaluation is the daily focus of our insurance managers, who know that the rewards of float can be drowned by poor underwriting results. All insurers give that message lip service. At Berkshire, it is a religion, Old Testament style.
Given both his and Munger’s ages, he also talks about their departure from this world and assures shareholders that the company is 100% prepared for this by being a diverse company, earning attractive returns and having the right people in place.
Year after year, Buffett has preached the same approach to investing, invest in quality, be prepared for ups and downs and believe in equities.
If you have any questions, drop me an email at steven@bluewaterfp.ie