Abraham Lincoln once famously said that if he were given six hours to chop down a tree, he would spend the first four hours sharpening the axe.
Investing in the stock market is also like this. The longer you study your behaviour and sharpen your “axe”, the better the results.
And in the contemporary financial markets, there is arguably no one better than the Oracle of Omaha Warren Buffett, chairman of Berkshire Hathaway and importantly — a legendary investor.
Fortunately for us, he writes a letter to shareholders each year detailing the financial results of his organisation in a lucid and interesting prose.
All of these letters are suffused with timeless investing lessons. Here we go through the letters written in the past one decade to glean a part of this timeless wisdom.
Let us begin the decade-long journey of Buffett-ism:
2022: Investing in high dividend paying firms: Buffett talks about the huge dividend income Berkshire Hathaway has earned from only two companies. Dividend received by Buffett’s Berkshire from Coke amounts to $704 million, and from American Express, this figure is $302 million. To buy their shares, Berkshire invested $1.3 billion each in 1994.
These stocks now make 5 percent of Berkshire’s investment.
Instead of investing $1.3 billion each in Coke and American Express in 1990s, if Berkshire had invested in the fixed income instruments such as high grade 30-year bond, the investment would have given an income of $80 million a year.
But by investing in equity, Berkshire now earns nearly $1 billion a year, and the total investment is also worth $47 billion, i.e. around 10 percent of Berkshire's net worth.
2021: Holding cash instead of investing in equity: Berkshire had $144 billion cash in 2021. The reason he gave was lack of good investing opportunities.
He believes one should not invest for the sake of it. “Berkshire’s current 80 percent -or-so position in businesses is a consequence of my failure to find entire companies or small portions thereof (that is, marketable stocks) which meet our criteria for long-term holding," he wrote.
2020: Bleak future of fixed income instruments: He says that fixed income instruments have a bleak future.
“In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future,” he says.
2019: Significance of operating earnings over quarterly gains: Focus on operating earnings instead of quarterly and annual gains or losses, whether realised or unrealised.
While quoting John Maynard Keynes reviewing Edgar Lawrence Smith’s book ‘Common Stocks as Long Term Investments’, Buffett writes that good companies may not announce dividend but instead plough back profits into their businesses, thus enjoying the fruits of compounding.
“Well-managed industrial companies do not, as a rule, distribute to the shareholders the whole of their earned profits. In good years, if not in all years, they retain a part of their profits and put them back into the business. Thus, there is an element of compound interest (Keynes’ italics) operating in favour of a sound industrial investment,” he writes
2018: Look at the larger picture instead of the individual units:
He says that it is not necessary to evaluate each tree individually to make a rough estimate of Berkshire's intrinsic business value.
While speaking further of the larger picture, he says that Berkshire may be the only company in the Fortune 500 that does not prepare monthly earnings reports or balance sheets.
2017: Aversion to debt: He emphasises that while trying to acquire new businesses, Berkshire makes sure that those businesses have sensible purchase price and they don't need to raise too much debt to finance the deal.
He also emphasised that Berkshire's taste for overall debt is very low.
“Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need,” he writes.
2016: Buying at the right price: He says any good business can also be a bad investment if it is bought at too high a price. So, a healthy investment is the one that not only is made in a good business but is done at a good price.
2015: Evergreen sectors: While justifying huge investment in plant and equipment, he emphasises that society will forever need huge investments in transportation and energy. during the same year, he did not have qualms about accepting his mistakes and wrong judgements.
“In most of these cases, I was wrong in my evaluation of the economic dynamics of the company or the industry in which it operates, and we are now paying the price for my mis-judgments,” he wrote.
2014: Intrinsic value over book value: He emphasises the need to look at a company's intrinsic value and not only the book value alone.
He says that the excess value (in reference to insurance float) will never be entered on books. But it is still real. “That’s one reason – a huge reason – why we believe Berkshire’s intrinsic business value substantially exceeds its book value,” he writes.
2013: Importance of holding stocks for a long time: While quoting Barton Biggs, he says that a bull market is like sex. It feels best just before it ends.
For this, he recommends investors to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs.
He also says that even a lay investor is certain to get satisfactory results when he diversifies and keeps his costs minimal.