Ideas & Debate

Pearls of wisdom from investor Warren Buffett

Warren Buffett’s letter contains top notch information for the trading world. FILE PHOTO | NMG
Warren Buffett’s letter contains top notch information for the trading world. FILE PHOTO | NMG 

Warren Buffett’s highly anticipated 53rd annual letter (released last Saturday) to Berkshire Hathaway’s shareholders did not disappoint.

There were tonnes of valuable investing lessons besides the usual quips – he jokes about investment bankers never turning down corporate deals (don’t ask the barber whether you need a haircut.) Here are three lessons from the letter.

On “risk-free” bonds vs common stocks, the famous octogenarian investor had this advice; “In any given day, stocks will be riskier – far riskier – than short-term bonds.

As an investor’s investment horizon lengthens, however, a diversified portfolio of equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.”

By this standard, Buffett warns that investments in “risk free” long-term bonds may actually be far riskier than long-term investments in common stocks especially in a rising inflation environment.

In our case, since we know that inflation (currently sitting at 4.5 per cent, however, the February figure should be out today) will rear its ugly head at some point in the near future, according to Mr Buffett, it’s safe to heavily lean on equities if you’re long-termer. Otherwise, you stand to suffer. Remember, even a one per cent annual rate of inflation decreases the purchasing-power of the government bonds.

On investor psychology, the legendary investor had this to say; “Seizing the market opportunities offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta.

What investors need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals.

A willingness to look unimaginative for a sustained period – or even to look foolish –is also essential.” Buffett seems to say that investors should focus on their long-term goals and understand it’s not going to be a straight line to get there. The problems of chasing returns and failing to stick to investment plans is the undoing of most investors.

On mutual fund fees and experts, Mr Buffett revisits a 10-year wager he made involving an investment in a cost-free investment in an unmanaged S&P 500 index fund (Buffett’s choice) against a universe of 200-plus hedge fund managers (picked by an investment advisor) charging management fees.

At the end of the bet (December 2017), the index fund averaged 8.5 per cent annually (one million investment would have gained Sh1.26 million) while the funds-of-funds averaged 3.15 per cent annually (one million would have gained a mere Sh363,000).

The disappointing results for the funds demonstrated one thing; most investment managers add zero value to investors. They are the only ones that benefit. Unfortunately, most investors will keep falling for the “investment expert” tag and still place their monies with funds.

Just for your information; Berkshire Hathaway’s (Buffett’s investment vehicle) gain in net worth during 2017 was Sh6.5 trillion, which increased the per share book value of both its class A and class B stock by 23 per cent.

Over the last 53 years, per share book value has grown from Sh1,900 to Sh21,175,000, a rate of 19 per cent compounded annually.