Some of the best contemporary professional investors credit reading Warren Buffett (Trades, Portfolio)'s letters as their best source of investment education. Other leading contemporaries have investment styles very similar to the guru. That is why it is important to be aware of the lessons we can garner from the Berkshire Hathaway Inc. (BRK.A, Financial) (BRK.B, Financial) shareholder letters, which this series focuses on. In today's discussion, I focus on an interesting section from the 2013 letter.
Buffett's investment principles
In the 2013 shareholder letter, the Oracle of Omaha discusses several important themes within intelligent investing, namely simplicity and a focus on fundamental principles. These are explored through personal anecdotes and wisdom drawn from his own experiences. The section, titled “Some Thoughts About Investing,” emphasizes the importance of a businesslike approach to investment and highlights the key principles he adheres to.
Interestingly, these characteristics are similar to those of one of BlackRock Inc.'s (BLK, Financial) best-performing equity funds of recent years, the BlackRock Global Unconstrained Equity Fund, which takes a long-term, fundamental view focusing on earnings growth.
Fundamental principles of investing
Buffett uses these stories to illustrate fundamental principles of investing.
The first is recognizing your limitations. Investors do not need to be experts to achieve satisfactory returns. However, they must recognize their limitations and follow a simple, conservative approach. Avoid the allure of quick profits.
Next, focus on future productivity. Evaluate an asset's future earnings potential. If you cannot estimate it reasonably, move on to another investment opportunity. No one can evaluate every possibility, so understanding your chosen actions is crucial.
Further, avoid speculation. Investing should be about the asset's potential to generate earnings, not its price fluctuations. Speculation is risky and often leads to poor outcomes. Past price appreciation is not a reason to buy an asset.
He also recommended ignoring short-term valuations. Rather, pay attention to the asset's long-term potential, not daily price fluctuations. Successful investors focus on the fundamentals of the asset, not the daily scoreboard.
Finally, ignore market predictions. Avoid forming macroeconomic opinions or listening to market predictions. Such distractions can lead to poor decisions and hinder focus on essential facts.
Businesslike investing and market fluctuations
This essay on businesslike investing discusses the difference between stocks and other investments like farms and real estate. Stocks, because of stock markets, provide constant valuations, which can be beneficial only if investors stay rational. However, many investors let market fluctuations and the behavior of others influence their decisions. Buffett emphasized that short-term market volatility should not affect long-term investors, and a climate of fear can even be advantageous for opportunistic investors. Buffett also reminded readers: “Price is what you pay, value is what you get.”
The influence of "The Intelligent Investor"
Buffett also singles out Benjamin Graham’s legendary book, "The Intelligent Investor," for important praise. He wrote:
"I learned most of the thoughts in this investment discussion from Ben’s book 'The Intelligent Investor,' which I bought in 1949. My financial life changed with that purchase.
Before reading Ben’s book, I had wandered around the investing landscape, devouring everything written on the subject. Much of what I read fascinated me: I tried my hand at charting and at using market indicia to predict stock movements. I sat in brokerage offices watching the tape roll by, and I listened to commentators. All of this was fun, but I couldn’t shake the feeling that I wasn’t getting anywhere.
In contrast, Ben’s ideas were explained logically in elegant, easy-to-understand prose (without Greek letters or complicated formulas). For me, the key points were laid out in what later editions labeled Chapters 8 and 20. (The original 1949 edition numbered its chapters differently.) These points guide my investing decisions today."
Conclusion
In conclusion, Buffett's 2013 shareholder letter underscores the importance of adopting a businesslike approach to investing, focusing on fundamentals and maintaining a long-term perspective. He emphasized that successful investing does not require expertise, but rather a disciplined and rational approach that avoids speculation and distractions. By sharing his own experiences and wisdom, Buffett provides valuable insights for investors seeking to achieve satisfactory returns over the long term.
