Category Archives: Stock Market Investing

Investor lessons from Warren Buffett’s 2018 letter to Shareholders

The 2018 version of the eagerly awaited annual letter to Berkshire Hathaway Shareholders by Warren Buffett has come out on Saturday 23rd February 2019. Here is a review of the letter from a long term investor’s perspective, along with a selection of top quotes within it.

As usual I expected the letter to contain valuable tips and advice to all dilligent investors, big and small. Reading through all the previous letters has provided an insight into the mind of the greatest investor of all time along with timeless strategies to apply along the journey to Financial Independence.

Starting on page 1, Buffett continues to show a comparison of the annual and compounded gains of Berkshire stock against those of the S&P 500. While 2018 presented negative returns for most investors, Berkshire managed to eke out a 2.2% percent gain compared to -4.3% for the S&P. This resulted in a long term annualised average of 20.5% for Berkshire versus 9.7% for the S&P.

Focus on the fundamentals of business is important

An important lesson outlined by Buffett is that it is important to focus only on the fundamentals of business rather than the wild swings in the stock market prices. This is evidenced by the wildly volatile markets of 2018.

My own portfolio suffered huge losses in the final quarter of the year as did Berkshire in contrast to good gains in the second and third quarters. New accounting rules made it appear that Berkshire generated less cash than in reality mostly due to the factoring in of unrealised gains.

When investing for the long term one should view the investments as actual businesses which generate real profits; profits which will eventually be reflected in the share price. No need to panic and act when share prices move up or down substantially over a short period.

With a large percentage of net worth comprised of stocks and shares one can expect their worth to vary substantially. Substantial gains will come, albeit at irregular intervals. As Berkshire investors should focus on operating profits, the individual investor should focus on the fundamentals of business and most of all maintaining a high savings rate.

Focus on the big picture

In personal finance and Financial Independence planning it is crucial to consider the overall picture rather than the miniature details. This means implementing changes which will make a real impact rather than the superficial. For example sometimes little expenses in life such as lattes bring the most joy so it does not make much sense to cut these out while spending a lot more on the big three line item: housing, transportation and food. Buffett refers to this by saying “Focus on the Forest – Forget the Trees”.

Another example is to consider your overall asset allocation rather than the make up of your emergency fund. No point stressing whether to hold a substantial amount of the funds in stocks when your overall asset allocation is not set up appropriately.

Also keep mindful that the returns from stock investments will eventually come close to or become larger than their purchase cost. This is evidenced by Buffett’s $1.3 Billion original investment in American Express; in 2018 the company provided earnings worth $1.2 Billion or 96% of the investment. Berkshire did not increase the the number of the company’s shares it owns but upped its share of ownership (from 12.6% to 17.9%) due to American Express repurchasing its own shares. Buy and hold works.

Long term investing is best

A commentary of the earnings of Berkshire’s World leading non-insurance operations including BNSF and Precision Castparts shows that they have increased year on year. Overall there was a 24% increase on 2017. This logic also applies with personal investing as I outlined regarding dividend growth here. Additionally you can view these gains as earning you a perpetual pay rise. With a diversified portfolio of many holdings, over time the combined earnings will be huge.

Top Quotes from the letter

Warren Buffett, with reference to investors selling Berkshire shares:

“In addition, certain shareholders will simply decide it’s time for them or their families to become net consumers rather than continuing to build capital. Charlie and I have no current interest in joining that group. Perhaps we will become big spenders in our old age.”

On being truthful about financial reporting:

Abraham Lincoln once posed the question: “If you call a dog’s tail a leg, how many legs does it have?” and then answered his own query: “Four, because calling a tail a leg doesn’t make it one.” Abe would have felt lonely on Wall Street.

In relation to dividend payments:

“Our level of equity capital is a different story: Berkshire’s $349 billion is unmatched in corporate America. By retaining all earnings for a very long time, and allowing compound interest to work its magic, we have amassed funds that have enabled us to purchase and develop the valuable groves earlier described. Had we instead followed a 100% payout policy, we would still be working with the $22 million with which we began fiscal 1965.”

On equity investments:

“Charlie and I do not view the $172.8 billion detailed above as a collection of ticker symbols – a financial dalliance to be terminated because of downgrades by “the Street,” expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour.”

The American Tailwind:

On March 11th, it will be 77 years since I first invested in an American business. The year was 1942, I was 11, and I went all in, investing $114.75 I had begun accumulating at age six. What I bought was three shares of Cities Service preferred stock. I had become a capitalist, and it felt good.

Let’s put numbers to that claim: If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before the printing of this letter). That is a gain of 5,288 for 1. Meanwhile, a $1 million investment by a tax-free institution of that time – say, a pension fund or college endowment – would have grown to about $5.3billion.

Charlie and I happily acknowledge that much of Berkshire’s success has simply been a product of what I think should be called The American Tailwind. It is beyond arrogance for American businesses or individuals to boast that they have “done it alone.” The tidy rows of simple white crosses at Normandy should shame those who make such claims.

There are also many other countries around the world that have bright futures. About that, we should rejoice: Americans will be both more prosperous and safer if all nations thrive. At Berkshire, we hope to invest significant sums across borders.

You can access the 2018 letter here.


How to react to a Bear Market and invest wisely

It has been a wild ride for all those heavily invested in stocks and shares. The past few months, culminating in a huge drop on Christmas Eve have been testing the nerve of diligent investors. With no sector industry spared, a lot stocks have dropped by over 20% from their all time peaks.

A Bear Market is defined as a condition where the stock market has fallen at least 20% and there is widespread negative sentiment around it. The past few weeks have definitely felt like this. When heading towards Financial Independence how should one react? Here are some tips on how to best handle a situation like this.

Do nothing

Sometimes the wisest thing to do in certain scenarios is absolutely nothing. This is certainly true in a volatile market situation.

When share prices are swinging up and down or dropping like a stone, the worst thing you can do is to sell your holdings.

I certainly had a close family member who was contemplating selling their shares recently and vowing to never invest again. Selling is clearly not the way to go so I tried talking the person out of it. Instead they should hold and do the next step.

Buy more shares

This will always be tricky for me as I always aim to have most of my funds invested in income generating assets such as low cost index funds. Therefore I can only take advantage of low stock prices with my latest income. If you have the funds available; buying shares at depressed prices will provide additional firepower when the market eventually bounces back, which it will.

Maintain a low information diet

Avoiding constantly checking the news is a good idea. Vanguard Investments’s Jack Bogle said you should rarely peek into your portfolio. Once you do after a very long time you will probably need a cardiologist when you find out how much is in there.

There is always something going on in the news, from trade wars, elections, interest rate hikes, military conflict, government debt piles, company profit warnings, taxes etc. You name it and someone always claims that it influenced a stock market move.

I must admit that I haven’t been able to fully commit to this step; instead I enjoy reading about business activities of interesting companies such as Tesla and Apple, along with all the FAANG super technology players. This often leads me to places such as the CNBC site or various business news Apps.

To try and resolve this, I previously deleted all the apps and bookmarks to various sites when prices were falling. However, when prices began shooting app I could not help but reinstall everything so that I could monitor what was going on.

I have not yet found a way around this as the information is easily available on our fingertips 24/7; but I am sure that with long term experience of different market conditions this will become a non issue. Fortunately, I have not had an urge to sell anything but have been eager to buy more.

Enhance your financial education

To best understand how the world economy works and how investor behaviour can be influenced it is useful to read a few books on investing and finance.

Top reads are A Random Walk Down Wall Street, The Millionaire Next Door and The Intelligent Investor. This activity should be able to fill your time by adding value, rather than being swayed by sensationalised headlines from Wall Street and City’s giant marketing machines.

Focus on the amount of units you own

A tip which I have found very useful is to not worry about the share prices or a net worth chart’s gyrations. These metrics, by nature fluctuate heavily particularly when you have a larger portfolio, so they are not a true reflection of where the real value is. Instead, track and focus on the quantity of units of stocks and shares that you own.

Tracking investment fund units

You will realise that you will pick up more units when prices are lower. This has the effect of boosting dividends over the long term. As shown above, there appears to be an exponential increase in the units within my portfolio, despite market swings and a largely similar savings rate.

Stay the course

The final tip is to not be worried and maintain investing according to your plan. This is where an Investment Policy Statement (IPS) would be crucial. When things seem edgy you can always refer to the document to remind you of your overall objectives.

The same strategy works even when investing during a bull market. I have covered how to invest in a rising market here. It is impossible to predict where the market will go; at the the time of writing the markets had been staging an impressive recovery from the December 24th lows when they dipped into Bear territory.

Interesting reading:

2018 – A long term Investor’s review

This image has an empty alt attribute; its file name is Screenshot-2018-12-15-at-09.47.21.pngWow. What a year 2018 has been from an investment perspective. The main theme has been a surge of volatility in the stock markets. For the long term investor, such volatilty is not a problem. In fact it presents some of those rare opportunities to pick up stocks at bargain prices. As Warren Buffett said in 2008: “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”  

Indeed 2018 has a lot of similarities with 2008. Unfortunately, as back then, today investors are pulling out of the stock markets as fast as they can instead of doing the opposite. If you are striving for financial independence, lower stock prices are the best thing that can happen while you are in the asset accumulation phase.

Where is the Santa Rally?

With only one week or so to go before the end of the year and no Santa Rally in sight it looks like most investors’ portfolios will turn out a little negative for the year. Here is a snapshot of my portfolio’s performance.

Globally diversified portfolio performance to 14 Dec. 2018 (YTD) GBP

As you can see, the portfolio is currently 10% off the high point in September; this is a major relief as I am now able to capitalise and obtain more units at a bargain. The only problem is not having enough spare cash to deploy.

Some of the portfolio movements can be attributed to fluctuations in the exchange rates as the portfolio is globally diversified.

This image has an empty alt attribute; its file name is Screenshot-2018-12-15-at-09.07.23.png

GBP to 15 Dec. 2018

The GBP has dropped in value over the past year. This not ideal as it means that foreign stocks are more expensive to buy but it also boosts the overall value of the portfolio as global stocks are worth more. This concept and impact of home bias is explored in an earlier post.

Net worth impact

The major revelation of the year for me came up when I was reviewing my net worth

I calculate a snapshot of net worth every 3 months in-order to develop a long term trend chart. Previously, due to the relatively small size of my holdings, the trend has been only going up. However, in the first quarter of 2018 there was a drop. This is nothing to be alarmed by and here are two reasons why.

First it illustrates the magnitude of the portfolio. As your portfolio grows larger the less and less your regular savings will have an impact on net worth.

The other reason is that it can make you reconsider or reaffirm you risk tolerance. It looks like there may be another drop in the fourth quarter leading to a relatively flat annual return.

A point to note is that there was also the largest record quarterly gain in the second quarter. This too had little to do with my regular savings but was mostly a direct result of a brief market resurgence.

Ignore the noise

There are always many distractions in the media about all sorts of events going on with the world economy or politics and predictions of how they will affect investment returns. The investment industry is mostly a giant marketing machine so it is crucial to focus on the fundamentals of business rather than sensationalised articles and a get rich quick mentality.

It is never a good idea for the long term investor to diligently follow the news and even worse act on what they see. Instead, the best thing to do is to focus on a high savings rate while investing regularly into low cost index funds.

I think 2019 will be another interesting year but have absolutely no idea where the markets will go. Focus will be on the things that matter; earnings growth of business, maintaining a good savings rate and keeping an eye on dividends. Speculative return is just a distraction.

£3000 for a new iPhone – no thanks


It is September again which means that Apple will be releasing its latest and greatest iPhone, their best selling product. Many will splash out a lot of cash on this gadget without assessing how this may impact their finances in future. After doing some assessment of my own I was astonished at how big the impact is due to the huge costs involved.

I have to admit that as an iPhone 6 user I have been tempted to jump on the bandwagon and upgrade to the new version of the product after watching the slick Apple 2018 keynote product launch presentation which was streamed from the Steve Jobs Theater in Cupertino.

The average selling price for iPhones is now higher than ever before following the release of the Xs, Xs Max and Xr versions with starting prices at $999, $1,099 and $749 respectively in the US. The annoying thing is that the same number (£999, £1,099 and £749 ) is used for the price in the UK despite the pound being stronger than the dollar. These prices are obviously crazy if you consider what other phones with similar specs are currently on the market.

Buying on contract

Costs are even crazier once you realise how much people end up paying by getting these devices on contracts as most cannot afford to pay cash upfront. My strategy is to buy a phone SIM free for cash and buy a separate monthly contract which is suitable for my needs. Currently I have a contract for just £10 a month and purchased an iPhone 6 for £260. The phone was refurbished but you couldn’t tell it apart from a brand new one.

To see how much a new iPhone would cost I logged on to my mobile service provider’s website. In-order to have the new iPhone Xs Max on a typical contract you would need to pay £100 cash and then £103 a month for 24 months. Over the 2 year period total costs would come up to £2,572.

As it is such an expensive purchase, the service provider suggest that you insure the device, at £14 monthly. This would result in a total cost of £2,908! This is shocking as I would have paid only £240 on my current plan over the same period by not doing anything. I might be missing something but the iPhone 6 seems to be pretty fast, runs the latest quicker IOS 12 software, has a good “retina” screen, decent battery life and perfect camera.

Investment impact

Being a personal finance geek, I decided to plug the numbers for the contract for upgrading into an investment calculator to find out how much someone could have from investing all the payments in the stock market (or better yet in Apple stocks) at a typical 10%  annual return rate.

Phone contract payments invested over 2 years

Phone contract payments invested over 2 years

The figures keep on rising and the final total cost for the insured gadget comes in at £3,364.24. This is definitely not worth it. I don’t  even want to go into the impact over a 10 year period.

Moore’s Law

While studying electronic engineering I got acquainted with Moore’s Law. Moore’s Law is an observation that the number of transistors in a microchip doubles every year while the costs are halved.

This is why computers have gotten smaller, better and cheaper with time. For this reason, the £3,000 iPhone we are considering here would have greatly devalued and seem outdated compared to new devices by the end of the contract. Some may consider taking a further hit then by buying the latest device.

I would prefer to maintain my current device for as long as practicable and invest in real assets for now. After investment, some of the proceeds may be used to get a good device at a good price in when the need arises.