Warren Buffett’s 2019 Letter* to Berkshire Hathaway Shareholders has been released in a timely manner, amid the panic gripping Global markets due to the Coronavirus (COVID-19) outbreak. As usual, for those seeking Financial Independence, there are likely to be gems of advice in the letter for how to keep a cool head in such times. I enjoyed reading the latest letter, so let us get into it.
“Be fearful when others are greedy. Be greedy when others are fearful.”
This is the most iconic advice by Warren Buffett. This is not a core message in the latest letter but worth taking note of as one of the keys to successful long term investing. Instead of running for the hills; it is best to keep calm rather than sell shares at this point. Instead most dedicated investors will be happy about any buying opportunities. It is interesting how people run to the shops to buy goods on sale but rush to sell when the market becomes less expensive. Whether it is socks or stocks, we like it cheap.
Retained earnings are key to compound growth
When buying stocks, one is buying fractional pieces of businesses rather than short-term gambling on market gyrations. A business’ earnings can be reinvested in the company and or distributed to Shareholders as dividends.
Buffett, with advice from economist Edgar Lawrence Smith, writer of Common Stocks as Long Term Investments and John Maynard Keynes, asserts that companies which retain and reinvest part of their profits will grow with an element of compound interest.
Mind-boggling wealth was amassed by Rockefeller, Ford, Carnegie and others by following this simple principle. Today investors can emulate this by regularly investing in low cost index funds; the “Accumulation” type which automatically reinvest dividends. Berkshire Hathaway has deployed a total of $121 billion on property, plant and equipment against depreciation charges of $65 billion.
It is all about the units you own & having a long term view
A picture is worth a thousand words. This image captured from the letter is worth a long look. These are the partly owned companies within Berkshire Hathaway’s investment portfolio. It shows that you should focus on the number of units or shares of your stock investments rather than the movements in the price. Over time, the price per unit will increase due to earnings resulting in a market value which far surpasses the cost price. Buy and hold is the best strategy.
According to Buffett, due to the power of the economy and wonders of compound interest, stock investments will outperform bonds over the long run, but only for those who can control his or her emotions. Others or those who use borrowed money should beware!
He also notes that occasionally, market drops of perhaps 50% magnitude or even greater will occur.
*The 2019 letter can be accessed here.