When the Oracle of Omaha Speaks

It’s like Christmas when Warren Buffett’s Annual Letter to Shareholders is published. With Berkshire Hathaway posting a record profit in 2013, the Oracle of Omaha writes, “Charlie [Munger] and I have always considered a ‘bet’ on ever-rising U.S. prosperity to be very close to a sure thing.”

To that end, Berkshire increased its ownership interest last year in each of its “Big Four” investments – American Express, Coca-Cola, IBM and Wells Fargo. According to Buffett, “The four companies possess excellent businesses and are run by managers who are both talented and shareholder-oriented. At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of a so-so business; it’s better to have a partial interest in the Hope diamond than to own all of a rhinestone.” He also notes that Berkshire Hathaway invests in quality companies that manufacture “products ranging from lollipops to jet airplanes.”

Buffett also uses real estate investments in a farm and NYU real estate to deliver a treasure trove of investment advice, noting that these two investments “probably increase in the decades to come. Though the gains won’t be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren.” He advises:

  • You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well.
  • Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
  • Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on.
  • Don’t worry about daily valuations. Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
  • Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

Buffett concludes that when he made his real estate purchases in 1986 and 1993, he had no interest in what the economy, interest rates, or the stock market might do in the years immediately following. He notes, “I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU. (Note from Gordon: The real estate purchases to which he refers is a farm in Nebraska and retail space next to NYU in New York City.)”

Buffett’s long-term view applies to anyone saving for retirement. That is, if you have a carefully designed, well diversified investment portfolio, short-term events like the Financial Crisis don’t matter.  Rather, keep your eye focused on the long-term. In fact, investors would be less prone to mistakes if they would treat their stock investments similarly to their real estate and simply ignore day-to-day or month-to-month market fluctuations.

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