Last weekend, the Oracle of Omaha released his much-awaited annual letter to shareholders. Generally loaded with simple yet profound investment wisdom, this time too it was no different. For investment enthusiasts, the collection of all his annual letters in https://www.berkshirehathaway.com/letters/letters.html makes for very good reading, and can help with the basic steps to build upon your financial quotient. For those with paucity of time, we recommend the Big Story in our bl.portfolio edition dated March 6, 2022, wherein we had culled some of his best and most enduring investment lessons from the entire collection of his annual letters.
So what are the interesting lessons he has this time?
Well, to begin with, he debunks efficient market theory. Many a time, when markets trade at excessive levels, there are market participants who come to defend it with views like ‘market knows best’ or ‘market knows something that we don’t.’ But Buffett is not in that category. According to him, ‘Efficient markets exist only in text books. In truth, marketable stocks and bonds are baffling, their behaviour usually understandable only in retrospect.’ In his view, it is crucial to understand that stocks often trade at truly foolish prices, both high and low. So, do keep this in mind if you ever consider buying the next excessively priced stock, justified based on a blue sky future scenario or, in quite a few cases, fantasy predictions. You need to build the emotional quotient to buy/not sell at foolishly low prices and sell/not buy at foolishly high prices. This might sound banal today, but this is what has always worked in the stock markets in the long run. If you stick to this discipline, your investment journey is taken care of, to a great extent.
He has another interesting lesson that investors can take heart from. If you have made some wrong investing decisions in the last two years and your portfolio performance is not good, regret not. Buffett, by his own admission, rates his capital allocation lessons as no better than so-so. Satisfactory results, according to him, have been the product of about a dozen truly good decisions (averages to about one every five years in his investing history).
He calls this the ‘Secret Sauce.’ The ingredients of his secret sauce are companies like Coca-Cola and American Express. The annual dividends alone he gets today represent 54 and 23 per cent of his original acquisition cost in Coca-Cola and American Express respectively. The bigger gain, though, has come from the appreciation in the stock prices in sync with the growth in dividends as well as due to dividend yields adjusting to expectation of future interest rates (stocks appreciate, resulting in lower dividend yields when interest rates decline — the trend largely witnessed in previous two decades ). So investors must look to do bargain hunting in quality companies that can churn annual positive cash flows (distributed as dividends or buybacks). Buying such companies during times of panic, when their current dividend yield is high in a high interest rate environment, can be very rewarding in the long run. In doing this you must ensure the company is well-positioned to grow earnings and distribute them consistently in the long run.
So his key point here to investors — ‘the weeds wither away in significance as the flowers bloom.’ Accept any past investing mistakes and do not try to fix them. Make fresh decisions, going ahead, with better discipline and research. Your current decisions can quite easily make up for the past mistakes in the long run.
Look for real earnings
And finally, while there are many more lessons, there is one word of advice that managements of unicorns and decacorns (listed and unlisted) would do well to pay heed to — he finds the activity of manipulating operating earnings figures ‘disgusting’. According to him, ‘It requires no talent to manipulate numbers. Only a deep desire to deceive is required.’ The key takeaway here for you — stay away from investing in companies still living on adjusted metrics for signs of profitability!
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