When you we want to learn something, we will often think of the most accomplished person/ Greatest of All Time (GOAT) and learn from their experience.
If we want to be a pro soccer player, the name Cristiano Ronaldo or Lionel Messi comes to mind.
If we want to excel in swimming, we would examine how Michael Phelps swim and emulate it.
The same goes for investing and the man is definitely Warren Buffett aka Oracle of Omaha.
Warren Buffett for the uninitiated is arguably one of the world’s most successful investor and has a track record to back it up.
His company Berkshire Hathaway achieved an astounding 20% compounded annual gain from 1965 – 2020, compared to the S&P500 which came in at 10.2%. For every $1000 invested in Berkshire in 1965, it would have grown to $22.6m. The same amount of money in S&P500 would come up to $200k, approximately 10 times lower.
Every year, people from all around the world flock to Omaha just to hear Buffett speak at the Annual General Meeting (AGM).
However not everyone of us has the ability to own 1 share of Berkshire A class share (priced at 375,000 USD) which entitles an entry to the AGM. Luckily for us layman, we are able to have insights to Buffett’s thinking and timeless advice as he makes it a point to pen down his thoughts in a yearly shareholder letter which is accessible to everyone.
Warren Buffett has recently released his 2021 letter and below are the lessons
1. Admitting the mistake & learning from it
Even the greatest investors make mistakes, but more importantly its about knowing what went wrong in the process and learning from it for future purchases.
No one misled me in any way – I was simply too optimistic about PCC’s normalized profit potential. Last year, my miscalculation was laid bare by adverse developments throughout the aerospace industry, PCC’s most important source of customers.
In purchasing PCC, Berkshire bought a fine company – the best in its business. Mark Donegan, PCC’s CEO, is a passionate manager who consistently pours the same energy into the business that he did before we purchased it.
We are lucky to have him running thing . I believe I was right in concluding that PCC would, over time, earn good returns on the net tangible assets deployed in its operations. I was wrong, however, in judging the average amount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business.
PCC is far from my first error of that sort. But it’s a big one.
2. Bond are not the place to be these days
10-year US treasury bonds was recently at 0.93% yield, fallen 94% compared to the 15.8% yield in Sep 1981. He warned that fixed income investors worldwide face a bleak future.
Some insurers or other bond investors may try to increase the pathetic current returns by shifting their purchases to obligations backed by shaky borrower. However, that is not the answer to inadequate interest rates.
3. Never bet against America
In his letter, Buffett shared success stories abound throughout America. Despite several interruptions, the country’s economic progress has been breathtaking. In its brief 232 years of existence, however there has been no incubator for unleashing human potential like American.
Beyond that, we retain our constitutional aspiration of becoming “a more perfect union.” Progress on that
front has been slow, uneven and often discouraging. We have, however, moved forward and will continue to do so.
Our unwavering conclusion: Never bet against America.
4. There will always be noise, patience pays
Buffett acknowledged that there are always many ways to attract investors money. Like the recent Gamestop hype, there will always be “noise”. However at Berkshire, the strategy is to grow patiently over the long term.
The tens of millions of other investors and speculators in the United States and elsewhere have a wide variety
of equity choices to fit their tastes. They will find CEOs and market gurus with enticing ideas. If they want price
targets, managed earnings and “stories,” they will not lack suitors. “Technicians” will confidently instruct them as to
what some wiggles on a chart portend for a stock’s next move. The calls for action will never stop.
In 1958, Phil Fisher wrote a superb book on investing. In it, he analogized running a public company to
managing a restaurant. If you are seeking diners, he said, you can attract a clientele and prosper featuring either
hamburgers served with a Coke or a French cuisine accompanied by exotic wines. But you must not, Fisher warned,
capriciously switch from one to the other: Your message to potential customers must be consistent with what they will
find upon entering your premises.
At Berkshire, we have been serving hamburgers and Coke for 56 years. We cherish the clientele this fare has
5. Fees stay
Wall Street do not work for free and their job is make investors transact more and rack up fees. The best is to diversify and minimise transaction and fees.
All that’s required is the passage of time, an inner calm, ample
diversification and a minimization of transactions and fees. Still, investors must never forget that their expenses are
Wall Street’s income. And, unlike my monkey, Wall Streeters do not work for peanuts.
The message brought across by Warren Buffett has been consistent; believing in the America tailwind, have ample diversification, minimise transaction and fees.