Like every year, last week too the legendary investor Mr. Warren Buffett presented the Annual Accounts for his company Berkshire Hathaway Incorporated (you need Rs.2 crores to buy its ONE share).
Like every year, this year too he shared many nuggets of wisdom in his customary letter to the shareholders.
Here's what we can learn from the same and make our investments highly profitable.
One. "Focus on the Forest. Forget the Trees."
This comment is actually in relation to the Warren Buffet's company Berkshire Hathaway, which "comprises of many and diverse businesses... economic 'trees', so to speak. A few of our trees are diseased and unlikely to be around a decade from now. Many others, though, are destined to grow in size and beauty. Shareholders need not analyze each of these separately. Rather, they can be studied in 4-5 distinct groups to arrive at a meaningful estimate of the company's intrinsic value."
Likewise, I firmly believe that mutual fund investors too should construct a well-diversified and balanced portfolio of above-average funds... 'a forest of economic trees'. These should be spread across different categories, AMCs and markets. Once this is done, there is no need to 'frequently' assess the performance of each and every fund. Instead, one should just focus of the overall returns and review / restructure the portfolio maybe once a year.
Two. "Our investees paid us dividends of $3.8 billion last year, a sum that will increase in 2019. Far more important than the dividends, though, are the huge earnings that are annually retained by these companies. GAAP does not allow us to include the retained earnings of investees in our financial accounts. But those earnings are of enormous value to us."
Indian investors, however, have a fascination for dividends. Instead it would be much more profitable if we let the NAV grow with time. From compounding perspective, Growth option is a far better option to make money than the Dividend Option. Plus, you will pay less tax under Growth Option as compared to the Dividend Option.
Three. "Berkshire held $20 billion in miscellaneous fixed-income instruments. We consider this to be untouchable, having pledged to always hold at least $20 billion in cash equivalents to guard against external calamities. We have also promised to avoid any activities that could threaten our maintaining that buffer."
In other words, howsoever large our income maybe, we must have an Emergency Fund to handle any unfortunate eventualities. We can't simply hold most of our money in illiquid assets (such as property) or volatile investments (such as equity). Many people in India (a) have a portfolio which is heavily overweight on property and (b) don't take a long term view when investing in equities. Moreover, we have to keep this money in safe instruments like Bank Fixed Deposits or Liquid / Ultra Short-term Funds, so that amount remains intact and is readily available, if required.
Four. "My expectation of more stock purchases is not a market call. Charlie and I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities. Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price. (Further) it would be foolish for us to sell any of our wonderful companies even if no tax would be payable on its sale. Truly good businesses are exceptionally hard to find. Selling any you are lucky enough to own makes no sense at all."
When even the best investor in the world cannot predict the market, it would be utter foolishness to believe that we can do so. Therefore, the sooner we get over this fixation for prediction, the better it would be for creating lots of wealth. The best strategy is buy good mutual funds and hold them for a long (long) time... preferably forever. Read How Rs.1 Lakh Became Rs.1 Crore In Mutual Fund Scheme.
Five. "On March 11th, it will be 77 years since I first invested in an American business. The year was 1942, I was 11, and I went all in, investing USD 114.75. If my USD 114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth USD 606,811. (Instead, suppose) to "protect" yourself, you might have eschewed stocks and opted instead to buy 3-1/4 ounces of gold with your USD 114.75. And what would that supposed protection have delivered? You would now have an asset worth about USD 4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle."
Indian investors, however, have a fascination for gold. You can yourself see what a terrible gift you will give to your daughter if you continue with this misguided allure of buying gold for her marriage. Thankfully, we now have the easy option to benefit from the stock market — proven mutual fund schemes... simple unmamaged investment in Indian business.
Concluding: There's lot to learn from Warren Buffett's proven ideas and how best to invest our savings for maximum and massive gains.
Like every year, this year too he shared many nuggets of wisdom in his customary letter to the shareholders.
Here's what we can learn from the same and make our investments highly profitable.
One. "Focus on the Forest. Forget the Trees."
This comment is actually in relation to the Warren Buffet's company Berkshire Hathaway, which "comprises of many and diverse businesses... economic 'trees', so to speak. A few of our trees are diseased and unlikely to be around a decade from now. Many others, though, are destined to grow in size and beauty. Shareholders need not analyze each of these separately. Rather, they can be studied in 4-5 distinct groups to arrive at a meaningful estimate of the company's intrinsic value."
Likewise, I firmly believe that mutual fund investors too should construct a well-diversified and balanced portfolio of above-average funds... 'a forest of economic trees'. These should be spread across different categories, AMCs and markets. Once this is done, there is no need to 'frequently' assess the performance of each and every fund. Instead, one should just focus of the overall returns and review / restructure the portfolio maybe once a year.
Two. "Our investees paid us dividends of $3.8 billion last year, a sum that will increase in 2019. Far more important than the dividends, though, are the huge earnings that are annually retained by these companies. GAAP does not allow us to include the retained earnings of investees in our financial accounts. But those earnings are of enormous value to us."
Indian investors, however, have a fascination for dividends. Instead it would be much more profitable if we let the NAV grow with time. From compounding perspective, Growth option is a far better option to make money than the Dividend Option. Plus, you will pay less tax under Growth Option as compared to the Dividend Option.
Three. "Berkshire held $20 billion in miscellaneous fixed-income instruments. We consider this to be untouchable, having pledged to always hold at least $20 billion in cash equivalents to guard against external calamities. We have also promised to avoid any activities that could threaten our maintaining that buffer."
In other words, howsoever large our income maybe, we must have an Emergency Fund to handle any unfortunate eventualities. We can't simply hold most of our money in illiquid assets (such as property) or volatile investments (such as equity). Many people in India (a) have a portfolio which is heavily overweight on property and (b) don't take a long term view when investing in equities. Moreover, we have to keep this money in safe instruments like Bank Fixed Deposits or Liquid / Ultra Short-term Funds, so that amount remains intact and is readily available, if required.
Four. "My expectation of more stock purchases is not a market call. Charlie and I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities. Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price. (Further) it would be foolish for us to sell any of our wonderful companies even if no tax would be payable on its sale. Truly good businesses are exceptionally hard to find. Selling any you are lucky enough to own makes no sense at all."
When even the best investor in the world cannot predict the market, it would be utter foolishness to believe that we can do so. Therefore, the sooner we get over this fixation for prediction, the better it would be for creating lots of wealth. The best strategy is buy good mutual funds and hold them for a long (long) time... preferably forever. Read How Rs.1 Lakh Became Rs.1 Crore In Mutual Fund Scheme.
Five. "On March 11th, it will be 77 years since I first invested in an American business. The year was 1942, I was 11, and I went all in, investing USD 114.75. If my USD 114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth USD 606,811. (Instead, suppose) to "protect" yourself, you might have eschewed stocks and opted instead to buy 3-1/4 ounces of gold with your USD 114.75. And what would that supposed protection have delivered? You would now have an asset worth about USD 4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle."
Indian investors, however, have a fascination for gold. You can yourself see what a terrible gift you will give to your daughter if you continue with this misguided allure of buying gold for her marriage. Thankfully, we now have the easy option to benefit from the stock market — proven mutual fund schemes... simple unmamaged investment in Indian business.
Concluding: There's lot to learn from Warren Buffett's proven ideas and how best to invest our savings for maximum and massive gains.