Some takeaways from the value investor's latest letter to shareholders
February 28, 2020
Warren Buffett (Trades, Portfolio)'s 2019 letter to investors of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) couldn't have been published at a better time.
The week after the letter was published, markets around the world started plunging. They haven't stopped since.
Luckily, Buffett's letter contained some nuggets of information to help investors keep a cool head in the current turbulent environment.
Buffett's advice for long term-investors
No matter what your opinion of the Oracle of Omaha, you cannot deny that he has a vast amount of experience when it comes to investing. He has been buying and selling stocks and businesses since he was a teenager. That means he has around seven-and-a-half decades of experience in the market.
He has seen it all during this time: market crashes, bubbles, scams, the most prominent corporate failures of all time, conflicts, terrorist attacks, virus outbreaks and everything in between.
As such, Buffett has experience dealing with every market environment. His experience alone means that his advice is worth reading.
Here's what Buffett said in his annual letter when commenting on Berkshire's top equity holdings:
"Charlie and I do not view the $248 billion detailed above as a collection of stock market wagers – dalliances to be terminated because of downgrades by "the Street," an earnings "miss," expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour. What we see in our holdings, rather, is an assembly of companies that we partly own and that, on a weighted basis, are earning more than 20% on the net tangible equity capital required to run their businesses."
In other words, Buffett views his investments not as gambling chips in a casino, but as an ownership stake in high-quality businesses.
He went on to state that he and Charlie Munger "have no idea what rates will average over the next year, or ten or thirty years," but that they're confident that stocks will outperform bonds going forward, especially those companies that earn a high return on capital.
Buffett also warned his readers about the unpredictability of the stock market:
"Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market, perhaps of 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 [Edgar Lawrence 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."
Don't worry
These few paragraphs from Buffett give us great insights into his investing mentality. Whenever he looks at a stock, he views it as a business. He's only looking to own high-quality companies with definite competitive advantages, which will help them produce high-double digit returns on invested capital over the long-run.
Buffett's not worried about what happens in the market in the short term. He's also not interested in trying to predict macro developments. His experience has taught him that, over the long run, high-quality businesses outperform, no matter what the macro environment.
We should keep this view in mind in the current market correction. Panicking and selling could be a big mistake. The global economy might suffer if the Covid-19 outbreak becomes a global pandemic, but in five or ten years, this set-back will seem like a distant memory. Companies that suffer a setback will have recovered, and the market's best businesses will undoubtedly be in a better position than they are today.
It is at times like these when it is essential to remember that investing is a marathon, not a sprint.
https://www.gurufocus.com/news/1057672/warren-buffett-2019-letter-dont-fret-about-market-declines
Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.
February 28, 2020
Warren Buffett (Trades, Portfolio)'s 2019 letter to investors of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) couldn't have been published at a better time.
The week after the letter was published, markets around the world started plunging. They haven't stopped since.
Luckily, Buffett's letter contained some nuggets of information to help investors keep a cool head in the current turbulent environment.
Buffett's advice for long term-investors
No matter what your opinion of the Oracle of Omaha, you cannot deny that he has a vast amount of experience when it comes to investing. He has been buying and selling stocks and businesses since he was a teenager. That means he has around seven-and-a-half decades of experience in the market.
He has seen it all during this time: market crashes, bubbles, scams, the most prominent corporate failures of all time, conflicts, terrorist attacks, virus outbreaks and everything in between.
As such, Buffett has experience dealing with every market environment. His experience alone means that his advice is worth reading.
Here's what Buffett said in his annual letter when commenting on Berkshire's top equity holdings:
"Charlie and I do not view the $248 billion detailed above as a collection of stock market wagers – dalliances to be terminated because of downgrades by "the Street," an earnings "miss," expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour. What we see in our holdings, rather, is an assembly of companies that we partly own and that, on a weighted basis, are earning more than 20% on the net tangible equity capital required to run their businesses."
In other words, Buffett views his investments not as gambling chips in a casino, but as an ownership stake in high-quality businesses.
He went on to state that he and Charlie Munger "have no idea what rates will average over the next year, or ten or thirty years," but that they're confident that stocks will outperform bonds going forward, especially those companies that earn a high return on capital.
Buffett also warned his readers about the unpredictability of the stock market:
"Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market, perhaps of 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 [Edgar Lawrence 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."
Don't worry
These few paragraphs from Buffett give us great insights into his investing mentality. Whenever he looks at a stock, he views it as a business. He's only looking to own high-quality companies with definite competitive advantages, which will help them produce high-double digit returns on invested capital over the long-run.
Buffett's not worried about what happens in the market in the short term. He's also not interested in trying to predict macro developments. His experience has taught him that, over the long run, high-quality businesses outperform, no matter what the macro environment.
We should keep this view in mind in the current market correction. Panicking and selling could be a big mistake. The global economy might suffer if the Covid-19 outbreak becomes a global pandemic, but in five or ten years, this set-back will seem like a distant memory. Companies that suffer a setback will have recovered, and the market's best businesses will undoubtedly be in a better position than they are today.
It is at times like these when it is essential to remember that investing is a marathon, not a sprint.
https://www.gurufocus.com/news/1057672/warren-buffett-2019-letter-dont-fret-about-market-declines
About the author:
Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.
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