Warren Buffett is widely admired as one of the wisest investors in the world. He also speaks a lot of common sense, which is surprisingly rarely put into practice when it comes to investing. We like to think he would have a lot of positive comments about our investment philosophy.
He releases an annual letter to the shareholders of Berkshire Hathaway, his iconic company, and although he starts off with corporate analytics the report is always full of his legendary combination of wit and wisdom.
The 2014 shareholder letter was a particularly good one and echoes a lot of factors that we explain to clients about investing. Here are a few interesting extracts that we wholeheartedly agree with:
Be a patient and disciplined investor
Buffett has repeatedly told investors over the years that most of Berkshire Hathaway’s large stock positions would be held for many years. Success, he observes, will not be measured in one day, one month, one year or even one decade. Maintaining discipline and a long-term view in both up and down markets have been contributing factors to his prosperous career.
“What investors should absolutely avoid is market timing. Though practically all days are relatively uneventful, tomorrow is always uncertain. (I felt no special apprehension on December 6, 1941 or Sept 10, 2001.)”
“Investors, of course, can, by their own behaviour, make stock ownership highly risky. And many do.”
Continue investing in American Enterprises.
Okay, obviously there is an American bias to Buffett’s commentary, so I would translate ‘American Enterprises’ to Western capitalism as a whole.
In the first page of the letter, Buffett includes the historical returns of the Standard & Poor’s 500 for the past 50 years. During this time period, the performance of this index, which measures the largest corporations in America, has increased 11,196%. In his 50th letter, the revered investor remains optimistic about the United States:
“Charlie [Munger] and I have always considered a ‘bet’ on ever-rising U.S. prosperity to be very close to a sure thing. Who has ever benefited during the past 238 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder…Though the preachers of pessimism prattle endlessly about America’s problems, I’ve never seen one who wishes to emigrate (though I can think of a few for whom I would happily buy a one-way ticket).”
Ignore market noise.
There will always be Wall Street observers who think they know what the markets will do. All these predictions, however, simply amount to financial entertainment.
“Market forecasters will fill your ear,” Buffett wrote, “but will never fill your wallet.”
Manage risk and have a safety net.
Businesses and households alike can apply Buffett’s thoughts on risk management. Whether evaluating a business opportunity or adopting an investment strategy, take the time to assess the risks involved and understand your tolerance and capacity for taking risk. Ensure there is sufficient liquidity on hand and maintain a cash reserve for those inevitable rainy days.
“In our view, it is madness to risk losing what you need in pursuing what you simply desire.”
“We will always be prepared for the thousand-year flood; in fact, if it occurs we will be selling life jackets to the unprepared.”
“When bills come due, only cash is legal tender. Don’t leave home without it.”
A perspective on life and human nature.
Mr. Buffet recognizes though at times, he and his Vice-Chairman, Charlie Munger, don’t always see eye-to-eye, they both display a sincere appreciation for maintaining respect and civility during a debate. Finally, he remarks on the significant advantage that effort and determination can play in business and life.
“If you’ve attended our annual meetings, you know Charlie has a wide-ranging brilliance, a prodigious memory, and some firm opinions. I’m not exactly wishy-washy myself, and we sometimes don’t agree. In 56 years, however, we’ve never had an argument. When we differ, Charlie usually ends the conversation by saying: ‘Warren, think it over and you’ll agree with me because you’re smart and I’m right.’”
“Charlie told me long ago to never underestimate the man who overestimates himself.”
If you enjoyed these highlights, there are plenty more where they came from, plus an equally interesting, first-ever addendum written by Charlie Munger. You can read more of Buffett’s and Munger’s thoughts in their original context in Berkshire Hathaway’s 2014 annual shareholder letter.