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24 Lessons From Warren Buffett’s Annual Letters To Shareholders
He prefers to invest in companies that are already successful even if that success is undervalued by the market and that have a strong chance of continuing success over the long term. That conviction gives him the ability to buy even bigger portions of the companies in which he invests when the overall market goes into a downturn. With a downturn in progress and healthy gains already realized, he would have come out ahead.
With his owner mentality, however, Buffett used the downturn as an opportunity to amass an even greater share of the company. Companies have both tangible assets factories, capital, inventory and intangible assets, which include things like reputation and brand. For Buffett, those intangible things are of the utmost importance for value-driven investors. And this was an advantage that Buffett was beginning to see was inflation-proof. During inflation, the conventional wisdom has been that businesses with lots of tangible capital resources were the best bets.
With their factories and machinery, the thinking went, they could better weather the market impact of widespread lower purchasing power and higher costs. For the layman stock investor, the price is everything — buy low, sell high. For Buffett, investors succeed when they can ignore Mr. Market and his up-and-down emotional states. When it became clear that executives at some of the biggest banks on earth systematically underestimated the risks inherent to the assets they were trading in, it became difficult to defend the idea that prices were truly ever set rationally.
In the aftermath of the crisis, retail and institutional investors offloaded massive numbers of stocks in businesses weak and strong. Buffett is a moderate on the question of efficient markets and rational actors. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon. Buffett believes that markets are generally efficient.
He goes on,. A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential. His reasoning is simple: when others are fearful, prices go down, but prices are only likely to remain low in the short term. In the long term, Buffett is bullish on any business that creates great products, has great management, and offers great competitive advantages.
That was, for Buffett, a signal to buy. The underlying philosophy here is simple: hold onto your money when money is cheap, and spend aggressively when money is expensive. In , the country was still in the grips of a stock market crash that had begun in January. When Buffett invests, he is not looking at the innovative potential of the company or, in a vacuum, its growth potential.
He is looking for a competitive advantage. In , when Wall Street analysts were extolling the virtues of virtually every dotcom stock on the market, Buffett was seeing a repeat of an earlier time: the invention of the automobile. When the car was first invented, a naive investor might have thought that virtually every automobile stock was guaranteed to succeed. At one point, there were 2, separate car brands just in the United States. He observes that the airplane industry suffered similarly.
While the technological innovation was even more impressive than the car, the industry as a whole could be said to have failed most of its investors. By , the collection of all airline companies produced in the United States had produced a total of no profits whatsoever. His conclusion about dotcom stocks at the time was simple: there will be a few winners, and an overwhelming majority of losers.
Correctly picking the winners requires understanding which companies are building a competitive advantage that will be defensible over the very long term.
While Buffett himself may not feel comfortable taking a position in a company like Apple, he concedes that others might have stronger convictions about the future potential of an investment like that. Buffett goes on to discuss the Berkshire portfolio, which he says features all companies where he and Munger do not expect the underlying industries to change in a major way. When Coca-Cola first started, it was turning something relatively cheap to produce — syrup — into a branded product.
Just as Coca-Cola built an empire buying syrup and selling a lifestyle, Buffett has made Berkshire Hathaway an empire by buying boring companies and selling their ever-returning dividends. Since Apple first began buying back its own stock in , it has become one of most prolific stock repurchasers in history.
One might expect a figure like Buffett — simple, no nonsense, and focused on intrinsic value — to balk at the energetic spending of capital on stock repurchases.
Buffett is a bigger advocate of buybacks than many other investors and neutral observers of the stock market. Apple headquarters in Cupertino. Photo Source: Wikipedia. And a company that is in the habit of overpaying for anything — be it stock buybacks or new acquisitions — is not a good hold for a careful shareholder.
One striking example that he discusses at length in his letter to shareholders is that of Waumbec Mills in Manchester, New Hampshire. It was, by all accounts, an incredible deal. But despite the appealing nature of the deal, the acquisition still turned out to be a mistake for Berkshire Hathaway. No matter how hard the company worked to turn the struggling business around, it could not get any traction.
Buffett is known for his advocacy of the value investing paradigm — buying shares of companies that are underpriced relative to their value according to some kind of analysis of company fundamentals, meaning its dividend yield, price-to-earnings multiple, price-to-book ratio, and so on. Growth investors, the thinking goes, primarily look for companies that show they can grow at an above average rate.
Companies that growth investors like might look expensive today, but are worth it if they are going to grow at or above the expected rate. Value investors, on the other hand, purportedly ignore potential growth as a function in their fundamental analysis. Before this, Berkshire Hathaway had mostly made money from investing in stocks.au.ufeqeveqil.tk
Warren Buffett's Best Buys
Within a few years, the relatively high priced Dexter shoes were driven out of the market by a flood of cheap, imported versions. The price of the company went to virtually zero within just a few years. He called it the worst deal of his entire career. After Dexter Shoe fully shut down production in , the town of Dexter went into a depression.
According to Bloomberg, as of , it has still not recovered. What made this deal even worse for Buffett was the fact that he had conducted the deal not in cash — as he would virtually every other acquisition made through Berkshire Hathaway — but in Berkshire stock. In essence, I gave away 1.
Warren Buffett's Best Buys
Buying Dexter Shoe would have been a mistake either way, but using Berkshire stock to buy the company made the problem even worse. Each year that followed, his acquisition of Dexter Shoe became more and more expensive in retrospect, rubbing the salt in the wound. While Buffett believes that other countries, particularly China, have very strong economic growth ahead of them, he is still bullish, above all, for his home turf of the United States.
But, he adds, one should not take from any calamity the idea that America is in decline or at risk — life in America has improved dramatically just since his own birth, and is improving further everyday. Yet our citizens now live an astonishing six times better than when I was born.
The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential — a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War — remains alive and effective.
And we will regularly grumble about our government. Warren Buffett could not be farther from that image of the hustling networker. Buffett is a big advocate of inaction. In other words, constantly buying and selling stock, and thinking that you can get an advantage from your instincts or analysis, has been proven to lead, in most cases, to smaller gains. And not just for your average retail investor.
By , Warren Buffett was convinced that buying Berkshire Hathaway had been his first big mistake as an investor.
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He bought Berkshire Hathaway because it was cheap. The problem with that method, he reflects, is that mediocre companies the kind that get offloaded for cheap in the first place cost money in the time between you acquiring it and you selling it for a profit.
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The approach of the more mature Buffett is to never invest in a company that can be a success if held for a short period of time. It is to only invest in companies that can succeed over an extremely long period of time, like years or more.
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