Warren Buffett is widely regarded as one of the greatest investors in history. He is known as a value investor and demands a margin of safety (in the tradition of his mentor, Benjamin Graham) when he invests. He tends to acquire assets, largely from the universe of publicly traded companies, which are undervalued or out of favour when he does so. With an eye to value and not simply to price, he tends to bet on his analysis heavily, making large acquisitions once he has made up his mind – and ignoring the critics. This method has worked unfathomably well over the course of his investing career.
Buffett heads a large holding company called, Berkshire Hathaway (BRK.B), and makes purchases for this company. Buffett released his Letter to Shareholders for 2011 on February 25, 2012. Each of the letters he has released since 1977 can be found (at no cost) at: http://www.berkshirehathaway.com/letters/letters.html. These Letters to Shareholders are treasure troves for investment advice and excellent sources for gaining insight into what a truly great investor thinks of the economy as it stands and where he sees things going.
While I recommend reading all of the letters in full, I will highlight just a few of the sections I felt are worth repeating from this newest letter for 2011.
Regarding how he views stock ownership in companies, Buffett says, “We view these holdings as partnership interests in wonderful businesses, not as marketable securities to be bought or sold based on their near-term prospects” (Page 4). How very different this is than the constant drivel that spouts from the financial media, recommending buy-and-sell “investing” on a weekly, if not daily, basis. Rather than taking stocks as simply pieces of paper or a blip in your discount brokerage account to be moved about based on price fluctuations, Buffett views his positions as real ownership stakes in brick-and-mortar corporations – to be held for the long term once a decision has been reached to own at all.
Buffett goes on to say on Page 5 that, “They will then reawaken to what has been true since 1776: America’s best days lie ahead.” Depending on one’s definition of “America”, this may or may not be the case. I do believe that America (and Canada) will have great days in their future, but only for those who come prepared. The world is changing and the reality is that pension plans and other “take-care-of-me” entities are coming apart at the hinges. There are countless examples of this, and it is worrisome for anyone depending solely on those benefits. The key for anyone looking for the “best days ahead” will be to take responsibility of their investing and retirement plans whether on their own or with a quality financial planner to prepare for the future. Best days or not, there will be more crises to come and being properly invested is paramount to success.
Buffett spent a fair amount of time on the topic of share repurchases this year. This comes for two reasons. First, Berkshire Hathaway announced for the first time this past year that it may conduct share repurchases if the company could be bought once certain valuation criteria were met. Second, the company also took a significant stake in IBM which also repurchases its own shares. Of interest to me were two Buffett quotations, “When Berkshire buys stock in a company that is repurchasing shares, we hope for two events: First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and second, we also hope that the stock underperforms in the market for a long time as well” (Page 6), and “What should a long-term shareholder, such as Berkshire, cheer for during that period?... We should wish for IBM’s stock price to languish throughout the five years” (Page 7). To paraphrase his reasoning, Buffett points out that if someone is going to be a net buyer of stocks going forward, they would in fact be hurt by an increasing share price which would charge them more money for less shares. It is akin to an individual who is happy when gas prices go up simply because their gas tank is already full. The problem being, of course, that they will then pay this higher price when they return to fill up again in the future (Page 7).
Remember, share prices are driven by opinion and sentiment in the short term. A company can still be fundamentally improving even if its share price stays the same or even declines. In my experience, the above paragraph represents what I feel to be arguably the most poorly understood concept in the investing world, and yet perhaps the most important. Wrap your mind around this and you will “get” investing. Focus your energies on value and take advantage of fluctuations in price. Over the longer term, fundamental quality rises to the top.
Full Disclosure: No position in BRK.B and no intention to initiate one within the next 72 hours.
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