Investment lessons from Warren Buffett

Warren Buffett just published his annual letter to Berkshire Hathaway shareholders. The billionaire investor packed the letter with investment insights and time-tested wisdom that growing investors need.

In today’s article, I’ll share three lessons that I picked from the famous investor.

On buy and hold; the billionaire investor trashes one common misnomer that he’s a “buy and hold” investor. In the letter he states that: “……It is true that we own some stocks that I have no intention of selling for as the eye can see. But we have made no commitments that Berkshire will hold any of its marketable securities forever.”

Although this clarification does not apply to its controlled businesses, it’s nonetheless an important one.

Lesson; Just as there is a time to buy, there will always be a time to sell.

On investment manager fees, Buffett remarks that: “When trillions of dollars are managed by (investment managers) charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds”.

Now, for those who follow his act, you will remember the billionaire octogenarian has been making this point for over 10 years.

In 2005, he took a Sh100 million bet with an asset manager challenging them to pick a group of five hedge funds that it thought would beat an S&P 500 Index fund over 10 years.

Fast forward nine years through 2016, the bundle of hedge funds had compound annual returns of only 2.2 per cent compared with 7.1 per cent for the index fund.

In other words, Sh1 million invested in those funds would have gained Sh220,000. The index fund would meanwhile have gained Sh854,000. Buffett will almost certainly win the bet when it ends on December 31.

Lesson: As an investor, you’re better off buying the NSE-20 index stocks and holding them – there are no index funds in the market as yet.

Why? Just ask your fund manager’s performance net of fees, costs and expenses, it’s highly likely they’re lagging the index.

This underperformance is universal. However, the billionaire threw a bone to that crowd in his letter, reiterating that it’s not impossible to beat the index.

Lastly, on investment mistakes, the legendary investor had this to say: “…as is the case in marriage, business acquisitions often deliver surprises after the “I do’s,” I’ve made some dumb purchases, paying far too much for the economic goodwill of companies we acquired. That later led to goodwill write-offs and to consequent reductions in Berkshire’s book value…” This is important to note.

Lesson; investing is a risky business whichever way you cut it. There will be highs and lows. But despite all that, one needs to keep investing if they expect a meaningful return in the long run.

To get biblical (Ecclesiastes 11:1), send your grain across the seas, and in time, profits will flow back to you.

Having grown Berkshire’s book value at rate of 19 per cent compounded annually since 1965 (S&P 500 Index has grown 9.7 per cent in the same period), Buffett’s advice is certainly worth considering. With a net worth of Sh6.7 trillion (give or take), you cannot ignore him.