The letters of Warren Buffett …
What are they? Well, if this is the first time that you heard of these letters, it is very likely that you are new to investing or Warren Buffett. Thus, let me start by giving you the background of the author, his letters and their significance to the investment community around the world today.
Who is Warren Buffett?
Warren Buffett is the Chairman and CEO of Berkshire Hathaway Inc., a US-listed holding company that owns substantial interests in some of the most profitable and valuable companies of the world. They include Apple, Coca-Cola, American Express, Wells Fargo, US Bancorp and so on and so forth. He has accumulated a total of US$ 82 billion in net worth, hence, placing him as the third richest man and a living investment legend on planet earth today.
His letters …
They are written to his fellow shareholders of Berkshire Hathaway Inc to report on the latest happenings and future direction undertakings of the company and more importantly to the rest of the world, to impart his gems of wisdom and as well as decades of experiences in the field of investing. Tens of million investors around the world have read and studied his letters in search of insights to what or how they can do better when it comes to managing their own investments.
My Advice to New Investors
Read it. Study it. It is worth it. You will emerge as a better stock investor from it. Here, in this article, I’ll just share 5 lessons that I’d gotten out from reading the letters written by Warren Buffett. They are as follows:
#1: Investments into Productive Assets
Warren Buffett invests for steady and rising cash flows for the long-term. In his letter in 2011, he views a stock or a business as a ‘commercial cow’ which could produce ‘milk’, referring to recurring profits and cash flows for years or decades to come in the future. Also, in his letter in 2013, Buffett wrote that if your focus is on ‘prospective price change’ when buying stocks, you are in fact speculating and he is skeptical of anyone who claimed to have sustainable success in doing so in the stock market.
So, let me put it into perspective:
An investor is one who will be looking at a stock’s long-term income generating ability before investing into it for he wants to receive recurring dividend income or to have its shareholdings revalued higher as a result of sustainable growth in earnings in the future. A speculator is one who is just trying his luck buying into stocks in the hope that their prices might somehow jump in the future, which is not wise based on the writings of Buffett as he, after 78 long years of investing, has not seen anyone who has able to speculate his way to sustainable profits in the stock market. Thus, the question is: ‘Why would you?’
#2: Be Prepared for the Thousand-Year Flood
Jokingly, Warren Buffett remarked in his letter in 2014 that he would be the guy who sells life jackets if the thousand-year flood occurs in the future. What does it mean to be prepared for the thousand-year flood?
The answer lies in the ‘financial staying power’ of an investor. This is evident for Warren Buffett for he has maintained a sizeable cash balance of US$ 75+ billion within Berkshire Hathaway Inc in Q3 2019. While he also written that cash itself is a poor investment but he is holding onto them either as one who sets aside a portion of his cash as emergency funds or for standby cash for investments that are offered at great discounts in the future. In other words, Buffett believes not in being cash-strapped and is one who builds a sizeable buffer at all times.
#3: The Use of Debt or Borrowings
In his letter in 2010, Warren Buffett likens debt as being a double-edged sword. It can either make people rich or poor. Buffett is known to favour an investment into stocks where their businesses earn good return on equity (ROE) without or with little use of debt. But, having said that, Berkshire Hathaway Inc. had made investments into two companies which were funded by long-term debt such as Burlington Northern Santa Fe (BNSF) and MidAmerican. Nevertheless, Buffett is comfortable with them as the debt from both corporations are serviced by cash flows from operations which are stable and recurring in nature.
#4: Reduce Investment Fees at All Cost
In his letter in 2017, Warren Buffett wrote a profound statement: ‘Performance comes, Performance Goes. Fees never falter.’ This comes after Buffett emerged as the winner of a 10-Year Bet against Protege, a US-based investment advisory firm where Buffett has publicly challenged any investment firm to create a fund or funds to beat a ‘virtually’ cost-free unmanaged S&P 500 index fund. Protege, the firm who took up Buffett’s challenge, had failed to create funds to beat the returns of S&P 500 index fund despite having assembled a team of investment experts to manage these funds professionally over the last 10 years.
The conclusion of this bet is pretty simple. It is to educate the public, especially those had invested into unit trusts, to rethink about their investments. First, he wishes to point out about the recurring ‘fees’ involved in these investments for they are not cheap. Second, he wants us to consider if the worth of fees paid to fund managers. This is because fund managers are paid regardless of the fund’s investment performance over the long-term. Hence, the message is clear and it is to avoid investing into funds that charge high fees for they would erode your investment returns in the future.
#5: Continuous Learning is Important to Investors.
Warren Buffett is an avid reader, an active learner and one who appreciates the power of mentorship. It is evident as Warren Buffett revealed that he has read two books that had effectively shaped his investment life. The first is titled ‘The Intelligent Investor’ by his mentor, Benjamin Graham while the second is titled ‘Common Stocks and Uncommon Profits’ written by Philip A. Fisher. To-date, he remains committed to apply what he’d learnt from these books into investing in the stock market and now, Buffett believes that he should pass along this same investment wisdom to the next generation, which is us.
What Should I Invest in 2020 and Beyond?
The answer is: ‘Investment Education’. Instead of finding out what stocks to buy or speculate in 2020, why not take time to learn to become a better investor? It would be the most profitable thing to do if you are new to investing be it stocks or properties. Here, I’ll leave you with a link to the official website of Berkshire Hathaway Inc., where you can download his letters and annual reports to begin your progression towards becoming a better investor.