Since his teenage days when he earned profits by placing pinball machines in barber shops, Warren Buffett has been perhaps the world’s greatest capitalist. He has turned small change into billions many times over but ever since he taught Investment Principles at the University of Nebraska-Omaha when he was 21, he’s enjoyed the role of teacher as well.
On Feb. 27, he released the 50th annual shareholder letter for his conglomerate Berkshire Hathaway. Buffett’s letters review business results but also reveal investment philosophy and wisdom gained from both good and bad decisions among other counsel. An attentive reader could turn the 50 shareholder letters into a Master’s level education about investment and business leadership. There is abundant documentation of mind-blowing investment success (1,826,163 percent market value gains for Berkshire from 1964-2014 compared with 11,196 percent for the S&P 500) . But there also is guidance for any business owner seeking staying power or someone simply trying to make their personal capital live longer than they do.
In this year’s letter, Buffett acknowledges the crossover between business acumen and investment success, noting that “my experience in business helps me as an investor and my investment experience has made me a better businessman. Each pursuit teaches lessons that are applicable to the other. And some truths can only be fully learned through experience.”
Indeed, the Berkshire Hathaway name comes from a failed investment experience in the fading New England textile industry that Buffett admits was one of many mistakes he’s made. On balance, of course, his record is far more reflective of an extraordinary ability to recognize and execute opportunities to make money.
A talent for evaluating opportunity is important but Buffett also preaches a simple characteristic that anyone can possess — optimism.
“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),” Buffett wrote in this year’s letter. “The dynamism embedded in our market economy will continue to work its magic. Gains won’t come in a smooth or uninterrupted manner; they never have. And we will regularly grumble about our government. But, most assuredly, America’s best days lie ahead.”
A promising future aside, Buffett actually looks forward to the “interruption” phase of market cycles. Perhaps his most seminal shareholder letter quote came on this note in 1986.
“We have no idea — and never have had — whether the market is going to go up, down or sideways in the near or intermediate-term future. What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
With today’s U.S. stock market continuing to log new highs, the environment is closer to greedy than fearful. Therefore, the likelihood of exceptional returns for new money invested at this point is seemingly less than say March of 2009 when fear dominated. The challenge is to understand that low points are where the easy money is made.
As Buffett wrote in the 1989 letter, “to the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers. The finding may seem unfair but both in business and investments it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult.”
Sticking with an investment has proven more and more difficult as the average holding period of any position has shrunk consistently for the past 60 years for most investors. Short-termism results in fast-twitch, responsive decision making that can be detrimental to long-term success.
The Berkshire Hathaway letters clearly state criteria for investment. There is a documented process that leans toward buy-and-hold-forever decisions, knowing that volatility will be experienced. Buffett has even promoted the idea of individuals being limited to a punch card of 20 investment decisions in their lifetime. If you were limited, then you would put a lot more effort into the selection criteria and also commit more money to your best ideas than if it were easier to constantly shift in search of what the market favors.
“A hyperactive stock market is the pickpocket of enterprise,” Buffett wrote in the 1983 shareholder letter. Many investors could benefit simply by not pick-pocketing themselves via excessive transactions and the costs of chasing performance.