Last week, Warren Buffett's company Berkshire Hathaway Inc. declared its Annual Results for the year 2017.
As in the past, it includes the Chairman Mr. Warren Buffett's letter to its shareholders.
As in the past, it has some invaluable lessons on investments for us too. These would prove extremely useful and beneficial in managing our day-to-day personal finances.
Here's what Warren Buffett, in his infinite wisdom and experience, has to share with us.
1. How to buy stocks (or rather businesses!)
As per Warren Buffett "the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price."
This one sentence brilliantly captures the essence of investing in equity.
This is precisely what you TOO should consider before buying any shares.
Unfortunately, however, very few equity investors do this kind of detailed stock evaluation. More often than not, they depend on hot tips from brokers, friends, colleagues or media. Such shortcuts have resulted in lot more losses than gains.
You are to blame yourself for the losses, if you don't stick to the proven rules of investing in stock markets. Here's what Warren Buffett asks before buying stocks.
2. Bet on the right people
In the context of certain businesses that Warren Buffett acquired in 2017, he states "Precision Castparts bought Wilhelm Schulz GmbH, a German maker of corrosion resistant fittings, piping systems and components. Please allow me to skip a further explanation. I don’t understand manufacturing operations. Fortunately, I don’t need to bring knowledge to the table. Mark Donegan, CEO of Precision is an extraordinary manufacturing executive, and any business in his domain is slated to do well. Betting on people can sometimes be more certain than betting on physical assets."
Going by this logic, if you don't understand the stock markets, economy, balance sheet, profit & loss accounts etc., you should not buy stocks directly. You won't be able to analyze what to buy and what to sell, as mentioned in point 1 above.
Hence, as I have repeatedly advocated, if you don't have "sufficient expertise, sufficient funds and sufficient time", you should take equity exposure through the mutual funds ONLY.
It is always advisable to bet on the fund manager's expertise and experience, rather than your whims and fancies.
3. Never invest borrowed money into stocks
Warren Buffett rightly observes that "There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions."
Returns from equity are, on an average, far superior to the cost of debt. Hence, people are often tempted to borrow funds and invest in the stock markets.
This is a sure recipe for disaster.
Returns from equity will come in due course of time. But your interest meter is on from day one. Plus, you have to start repaying your loan too. This cannot be sustained for long. And, during market corrections, which will happen from time to time, it is easy to panic and make wrong decisions.
Moreover, apart from the actual losses, you may also lose golden opportunities to invest. As Warren Buffett states "When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt". It is the best time to put into practice Warren Buffett’s Margin of Safety?
4. Stick with big, “easy” decisions and eschew activity
As per Warren Buffett "Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful our investments will be successful as well."
Whereas most investors do exactly the opposite. They track stock prices. They follow charts. They trade very often. They believe that they are not a good investor if they are sitting idle.
Here, Warren Buffett suggests that you should heed to these lines from Kipling’s If:
"If you can keep your head when all about you are losing theirs . . .
If you can wait and not be tired by waiting . . .
If you can think – and not make thoughts your aim . . .
If you can trust yourself when all men doubt you . . .
Yours is the Earth and everything that’s in it."
In short, buy a few good mutual funds and just wait... for a decade or two. You would be pleasantly surprised with the returns. Read How Rs.1 Lakh Became Rs.1 Crore In Mutual Fund Scheme.
5. The misconception about the concept of 'risk'
Lastly, here are Warren Buffett's wise words on equity vs fixed-income debate "I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. 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.
It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment "risk" by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk."
Numerous studies, across different time frames, demonstrate that in the long run — at least 7 to 10 years — the probability of losing money from stocks drops to almost zero. Hence, contrary to popular perception, stocks are NOT risky.
On the contrary, inflation and taxes will most definitely erode the purchasing power of your rupee. In the long run — at least 7 to 10 years — the probability of losing money from fixed-income is almost 100%. Hence, contrary to popular perception, fixed-income investments are NOT risk-free.
Think!
As in the past, it includes the Chairman Mr. Warren Buffett's letter to its shareholders.
As in the past, it has some invaluable lessons on investments for us too. These would prove extremely useful and beneficial in managing our day-to-day personal finances.
Here's what Warren Buffett, in his infinite wisdom and experience, has to share with us.
1. How to buy stocks (or rather businesses!)
As per Warren Buffett "the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price."
This one sentence brilliantly captures the essence of investing in equity.
This is precisely what you TOO should consider before buying any shares.
Unfortunately, however, very few equity investors do this kind of detailed stock evaluation. More often than not, they depend on hot tips from brokers, friends, colleagues or media. Such shortcuts have resulted in lot more losses than gains.
You are to blame yourself for the losses, if you don't stick to the proven rules of investing in stock markets. Here's what Warren Buffett asks before buying stocks.
2. Bet on the right people
In the context of certain businesses that Warren Buffett acquired in 2017, he states "Precision Castparts bought Wilhelm Schulz GmbH, a German maker of corrosion resistant fittings, piping systems and components. Please allow me to skip a further explanation. I don’t understand manufacturing operations. Fortunately, I don’t need to bring knowledge to the table. Mark Donegan, CEO of Precision is an extraordinary manufacturing executive, and any business in his domain is slated to do well. Betting on people can sometimes be more certain than betting on physical assets."
Going by this logic, if you don't understand the stock markets, economy, balance sheet, profit & loss accounts etc., you should not buy stocks directly. You won't be able to analyze what to buy and what to sell, as mentioned in point 1 above.
Hence, as I have repeatedly advocated, if you don't have "sufficient expertise, sufficient funds and sufficient time", you should take equity exposure through the mutual funds ONLY.
It is always advisable to bet on the fund manager's expertise and experience, rather than your whims and fancies.
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| Hear what Mr. Warren Buffett has to say about who can be a "great" investor. |
3. Never invest borrowed money into stocks
Warren Buffett rightly observes that "There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions."
Returns from equity are, on an average, far superior to the cost of debt. Hence, people are often tempted to borrow funds and invest in the stock markets.
This is a sure recipe for disaster.
Returns from equity will come in due course of time. But your interest meter is on from day one. Plus, you have to start repaying your loan too. This cannot be sustained for long. And, during market corrections, which will happen from time to time, it is easy to panic and make wrong decisions.
Moreover, apart from the actual losses, you may also lose golden opportunities to invest. As Warren Buffett states "When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt". It is the best time to put into practice Warren Buffett’s Margin of Safety?
4. Stick with big, “easy” decisions and eschew activity
As per Warren Buffett "Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful our investments will be successful as well."
Whereas most investors do exactly the opposite. They track stock prices. They follow charts. They trade very often. They believe that they are not a good investor if they are sitting idle.
Here, Warren Buffett suggests that you should heed to these lines from Kipling’s If:
"If you can keep your head when all about you are losing theirs . . .
If you can wait and not be tired by waiting . . .
If you can think – and not make thoughts your aim . . .
If you can trust yourself when all men doubt you . . .
Yours is the Earth and everything that’s in it."
In short, buy a few good mutual funds and just wait... for a decade or two. You would be pleasantly surprised with the returns. Read How Rs.1 Lakh Became Rs.1 Crore In Mutual Fund Scheme.
5. The misconception about the concept of 'risk'
Lastly, here are Warren Buffett's wise words on equity vs fixed-income debate "I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. 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.
It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment "risk" by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk."
Numerous studies, across different time frames, demonstrate that in the long run — at least 7 to 10 years — the probability of losing money from stocks drops to almost zero. Hence, contrary to popular perception, stocks are NOT risky.
On the contrary, inflation and taxes will most definitely erode the purchasing power of your rupee. In the long run — at least 7 to 10 years — the probability of losing money from fixed-income is almost 100%. Hence, contrary to popular perception, fixed-income investments are NOT risk-free.
Think!
