Investing lessons from Warren Buffett’s letter to Berkshire Shareholders 2019 amid Coronavirus market panic

FTSE 100 EventsWarren 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

Berkshire Investments

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.

These Letters to Berkshire Shareholders are interesting and definitely worth reading as they contain timeless investing advice. I have also done a review of the letters for 2017 and 2018.

*The 2019 letter can be accessed here.

How to avoid lifestyle inflation to achieve Financial Independence

House and bicycleHousing, Transportation and Food are the big three categories to control in order to maintain a relatively high savings rate. To achieve financial independence (FI), the most important thing is your savings rate as I explained in a previous post here.

A lot of people try to find investments or other means with a high return rate. However, this may turn out futile if the necessary capital available to invest is not substantial. Good returns do not have a big impact if you intend to be financially free at a young age, considering that the stock market typically returns nominally 10% a year.

I am in the process of looking for a new place to live in January 2020 and this has made me to seriously consider my lifestyle costs in future. When I moved to new places previously, I did not  do the math well, particularly for housing and transportation costs in relation to my new lifestyle. In a number of cases, this has resulted in me being worse of either financially, by quality of life or both.

For example, when I moved for my current job (from Cambridge to London outskirts) my salary went up by 13%. This seems great but I ended up living 11 miles from work compared to 4 miles previously. This seemingly innocuous change turned a simple 20 minute commute into a gruelling drive of over an hour in rush hour traffic.

The new job meant that I lost many hours a month plus cash due to the long commute and I was generally more tired. It felt like I had already been to work when I got to work.

Housing and Transportation

I see management of these two elements as being critical in propelling me towards financial independence at this stage. It is not wise to find a cheap place to live which is very far from work, costing time, an arm and a leg to get there. For this reason, I have decided to find a rental within walking distance of the office. Costs will be roughly the same as the previous place but the commute by car or train will be completely eliminated, resulting in cost savings and 7 hours a week freed each week. That would be effectively gaining an extra work week each month! 

55% savings rate

To be financially free by my target date I have estimated that at least an average 55% savings rate will be required. This has been over 53% so far. I will also need to maintain the progress made by maintaining my core living expenses or even better by reducing them. To do this it is important to know current and expected expenses which will guide the search for new accommodation.

Housing and Transportation to gross income ratio

People often wonder how much they should spend on housing in relation to their income. It will depend on what you can afford and what you value in life. I was a bit shocked when the estate agent said that I could afford a place which is my gross salary divided by 30. This would mean that 53% of net pay would go towards housing which is ridiculously high. Admittedly I would get a nicer place but my financial independence progress would drop to only 29% and future savings to 35%. Achieving freedom would become practically impossible, leading to many more years in the cubicle.

Housing and Transportation to gross income ratio

With these facts in mind how much should one allocate towards housing and transport. I have been tracking how much I spend on these two since 2007 as shown the the graph above. When I started my first job in 2007 I lived in shared accommodation with very low costs and a 20% spend. However, within a year I got a small pay rise and had a huge bout of lifestyle inflation by moving to my own studio flat.

Now with a hefty 30% expenditure I managed to save absolutely nothing after a three year period and remained with even more credit card debt while having a negative net worth.

Over the next few years I moved locations for new jobs and back to shared accommodation. This enabled me to pay off the credit card and start the fi journey in 2012.

The housing and transport expenditure proportion has been steadily decreasing due to some some pay rises and is expected to get back to near 20% when I move to the new place. I find this to be an acceptable amount to pay. It may mean sacrificing a little luxury but will not derail progress towards financial independence within a few years.

*It is also important to stick to a budget while tracking your other expenses as these will affect the overall picture.


In summary, to maintain a 55% savings rate I would need to spend roughly 20% of my gross income to housing and transport to achieve financial freedom within 3 years. This is based on my current level (52%) of expenses covered by passive income.


I have found this to be the most comfortable scenario for me in relation to my goals. Everyone’s situation will be different.

Geographic Arbitrage

As I am currently based in one of the most costly areas of the UK (South East), applying some Geographic Arbitrage almost anywhere would definitely have a positive impact. Quality of Life could be increased and Cost of Living reduced readily so this will definitely be on the cards soon. In fact I realise that I am already 70% FI for less costly parts of the country.

Also, renting a place rather than owning is beneficial as one would be far more flexible to take advantage of opportunities and overall expenditure on housing and transport would be far easier to limit.

Things look set to get more exciting in the next couple of years as the snowball keeps gathering speed and size, opening up more possibilities and options.

The enduring strength of Index Funds and fallacy of active investing

The demise of Neil Woodford has been coming for a long time and has ended in a bloody nose for the active investment fund management sector. As long been explained by investing legends such as Vanguard’s John Bogle and Warren Buffett, investing using index funds is the only sensible way to go for most people.

Tough time for active investment funds

Active investing is going through a roller coaster ride which started when investors holding the Woodford Equity Income Fund were locked out of their assets. Things did not feel right and it was not a surprise when a few months later it was announced that trading the fund would be shut down. It was a shock for those who did not take time to educate themselves sufficiently about investing, rather deciding to go with the “British Warren Buffett”.

When this active fund was set up in 2015, I was still a novice at investing and followed the hype, buying some shares as part of my portfolio. However, within months I switched the shares to passive tracker funds, taking in the advice gleaned from books such as A Random Walk on Wall Street by Burton Malkiel. This was fortunate, as people who remained in the active Woodford fund have made huge losses.

Performance of the actively managed Woodford fund is shown in the chart below. In this relatively short period the passive FTSE All Share Tracker outperformed both the active fund and all funds within its category.

Woodford Equity Income Fund Performance (Morningstar UK)

Woodford Equity Income Fund Performance (Morningstar UK)

Focus in Costs

Achieving Financial Independence would already be impeded by the very high fees charged by active fund managers (0.75% per year in this case) compared to passive tracker funds which can be as low 0.06% – 13 times lower! This can easily run into hundreds of thousands of pounds over an investing lifetime. Additionally, it is highly unlikely to identify a star fund manager who can beat the market consistently over the long term.

Vanguard is leading the way by cutting costs while active managers are raking in millions for underperformance.

Performance is further degraded by frictional costs due to the frequent trading by active managers; typically selling when prices are low and buying when they are up.  

Low information diet

It is best to not succumb to the heavy marketing from the City and have a low information diet. Talk about asking the barber for a haircut, and getting a bad one at that.

As active fund managers are experiencing vey high outflows in the wake of the Woodford scandal, it is not a coincidence that the S&P 500 index has almost crossed over its all time high. Diligent long term passive investors will be disciplined and not worried about all these shannanigans.

This episode proves what has been outlined time and again on this and other platforms which seek to educate about the benefits of investing in index funds.

Time in the market works, rather than Timing the market. Financial education and staying the course are key to long term success.

Interesting reading:

Why I am Optimistic about future investment returns

New York City Skyline at DuskFuture stock market investment returns are likely to be very substantial, even more so than past returns. This is an interesting topic as I have had a few conversations recently with people who believe that future returns will be lower than before or even negative. Their reasons do not seem logical to me; particularly because they are mainly based on short term thinking, ranging from a few months to a few years and lack of understanding of how the stock market works. 

A crash is coming!

The most common reason for pessimism about future returns is that a stock market crash is imminent because the market has sharply risen to very high levels recently. Having been a stock market investor for nearly 10 years I have heard this all the time but it has not deterred me from investing.

In fact, I have often taken advantage of this negative sentiment by buying more shares at depressed prices. Without fail prices have always come back to where they were, sometimes after what felt like forever, but the end result is an outsized gain.

The key is to believe in “reversion to mean” of stock prices and remaining invested by not touching yourlong term investments when volatility happens. It is best to take the long term view, typically 5 to 10 years or more.

Dow Jones Index Chart (1985-2019)

The chart above of the Dow Jones Industrial Index shows investment returns since 1985. Red bars are years of negative returns. It is clear that over the long term, buy and hold investors have benefited, despite a few short term shocks along the way.

Here are a few reasons why the future of investments is bright.

The rise of new industries

The S&P 500 index is packed with great companies which have thousands of workers striving everyday to bring value to Shareholders. Over time we have seen new industries come, becoming bigger and superseding what was there before. It is hard to imagine that Amazon, Facebook, Netflix and Alphabet did not exist 30 years ago.

New industries are always developing according to the needs of the time and the new companies providing the required services or transforming accordingly will surely reap the benefits. In-order to participate  in this, the intelligent investor will realise this fact and construct a portfolio which invests in the stock indices that will hold such companies.

Billionaire Space Race

A good example is the new Space Race. Private entities like SpaceX, Blue Origin and Virgin Galactic are jostling for stakes in this space and the potential is huge. Space tourism would be highly profitable and take various forms. Governments are already contracting such companies for International Space Station missions. Mining operations in far off places like Mars may become possible. Establishing a true industrial base in space is another objective. Reusable rockets drastically reduce mission costs, accessibility and time.

Innovation

The pace of technological innovation in this Digital age is staggering. Take investing for example. A few decades ago the process was very cumbersome as one needed to hold and mail a lot of stock certificates. Information was not readily available therefore very few people had access to this and brokers charged astronomical fees to everyday investors. Today one can research and buy global stocks instantly on a handheld device.

In this and other sectors, automation is increasing productivity and has potential to drive up returns. It is certain that innovation will continue to happen, offering new opportunites, products and services.

Population growth

I remember a time when the World population was hovering around 6 billion. Today this has jumped by nearly 2 billion and is trending higher.

World Population data estimate - 8 Sept. 2019

World Population data estimate – 8 Sept. 2019

The graphic above from here is very interesting. Net population growth appears to be very high. This fills me with optimism; many more potential users of goods and services than ever before. Astonishingly it took 200,000 years to reach 1 billion; and only 200 more to 7 billion. More importantly, these bigger markets will be more and more prosperous than ever before, fuelling the growth of current and future corporations. 

Too much Information

Every time I turn on the news it seems like the world is about to end. From trade wars, geopolitics, questionable economic forecasts to severe weather events it is not hard to see why some believe that a recession is around the corner. The facts outlined above lead me to believe the opposite. It is best to have a low information diet and focus on the facts.

Gaining financial independence requires discipline in saving and investing so staying the course is vital. Staying optimistic will provide motivation over the long term.