Tuesday 27 February 2018

The Unimaginative Fool

A year ago, I wrote about Warren Buffett's annual letter to shareholders of Berkshire Hathaway, and as tends to be the case with annual events, the 2018 edition is now available, though at 17 pages, a lot shorter than his usual missive. 

As usual, the letter is full not only of common sense, but also of amusing lines.

On acquisitions, he writes:

Why the purchasing frenzy? In part, it’s because the CEO job self-selects for “can-do” types. If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life.
On the Berkshire 5K run this coming May, he writes: 
Entrants in the race will find themselves running alongside many of Berkshire’s managers, directors and associates. (Charlie and I, however, will sleep in; even with Brooks running shoes, our times would be embarrassing.) 
On retail 'savings':
Remember, the more you buy, the more you save (or so my daughter tells me when we visit the store).
As his daughter is 64, I'm not convinced this is a true story.

On dining:
Show you are a sophisticated diner by ordering the T-bone with hash browns.
On the magic of compound interest and the benefits of a buy and hold strategy, Buffett writes, after showing a chart of short-term price declines in the last 53 years:
This table offers the strongest argument I can muster against ever using borrowed money to own stocks. 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
As I mentioned last year, there are always parallels with sports investing, and that last sentence certainly applies to sports investing. 

Buffett continues:
In the next 53 years our shares (and others) will experience declines resembling those in the table. No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow. When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed 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.”
Other words of wisdom that stood out to me:
In the meantime, we will stick with our simple guideline: The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.
On risk:
Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. “Risk” is the possibility that this objective won’t be attained. 
On self-delusion, and also with relevance to sports investing and those promises of riches beyond your wildest dreams: 
As well-known analyst V.J. Dowling has pointed out, the loss reserves of an insurer are similar to a self-graded exam. Ignorance, wishful thinking or, occasionally, downright fraud can deliver inaccurate figures about an insurer’s financial condition for a very long time. 
Finally, most readers will be aware of the ten year $500,000 bet Warren Buffett made in 2007 that passively investing in the S&P 500 would beat any portfolio of at least five actively managed funds. As the years ticked by, the result was never in doubt, with 2008 the only year where the S&P 500 was beaten. 
The bet illuminated another important investment lesson: Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.
One very recent example is that after the markets entered correction territory a little over two weeks ago, the three main indexes I track are all back within 3.5% of their all-time highs, and in profit on the year, while the Brexit handicapped FTSE languishes a little further back, and negative in 2018, for those who didn't take my advice to follow US indices.
In more traditional financial markets, once again the main US benchmark index outperformed the UK's FTSE100. Only 4 times in the last 24 years has the FTSE prevailed, and the disaster that is Brexit means the US and Overseas markets are where most of my investments will again be in 2018.
Back to 'the bet' and Warren Buffett summarises:
Let me emphasize that there was nothing aberrational about stock-market behavior over the ten-year stretch. If a poll of investment “experts” had been asked late in 2007 for a forecast of long-term common-stock returns, their guesses would have likely averaged close to the 8.5% actually delivered by the S&P 500. Making money in that environment should have been easy. Indeed, Wall Street “helpers” earned staggering sums. While this group prospered, however, many of their investors experienced a lost decade.
Performance comes, performance goes. Fees never falter. 
In case you've missed earlier posts on the subject, of which there are several, invest in low-cost index funds and stay the course. 

No comments: