If you invested just $10,000 in Berkshire Hathaway in 1964, when Warren Buffet began managing and operating the company, you would have an astonishing $240,000,000 in 2017. This unheard of feat in the investing world has led Buffett to become the world’s 3rd wealthiest man, behind only Jeff Bezos and Bill Gates. Cryptocurrency pioneer Justin Sun revealed that he bid the record $4.57 million at a charity auction to just have lunch with Buffett. Sun stated that he bid so high in order to receive investing advice from Buffet, as advice from Buffet is almost impossible to receive. Buffet is so secretive with his knowledge because he considers any investment advising as proprietary information to his company, Berkshire Hathaway. These are 3 of the greatest investing tips I found through reading his annual letters to shareholders.
Picking the right investment is an extremely difficult and time consuming process. Research from the SPIVA (S&P Indices Versus Active) US Scoreboard in 2017 highlights the difficulty of investment professionals’ ability to beat the market. “Whether you look at the past 3, 5, 10, or 15 years, only about 15% of all professional mutual fund managers were able to beat the market. That’s less than 1 in 6 professional investors. These are people who are trained, paid, and spend their careers looking for the best investment opportunities.” If even the most highly trained investment professionals struggle to beat the market, how can we expect to? Buffet addresses this point saying that he has no idea how stocks will behave in the next week or next year. Predictions of that sort have never been a part of his activities. His thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price.
In the 2017 annual shareholder letter, Buffett discusses the results of a bet he made with Protégé Partners, an asset management firm based in New York. Protégé selected five investment experts. They, in turn, employed several hundred other investment experts, each managing his or her own hedge fund. This assembled an elite crew loaded with brains, adrenaline, and confidence. The managers of the five funds-of-funds possessed a further advantage: they could – and did – rearrange their portfolios of hedge funds during the ten years, investing with new “stars” while exiting their positions in hedge funds whose managers had lost their touch. Over a 10 year period they tracked the performance of the 5 funds-of-funds and compared their performance to an S+P index fund.
The five funds-of-funds got off to a fast start, each beating the index fund in 2008. Then the roof fell in. In every one of the nine years that followed, the funds-of-funds as a whole trailed the index fund. While these fund-of-funds managers earned staggering sums, many of their investors suffered a lost decade.
The price is what you pay, and value is what you get. Pay too high of a price and returns are impossible. In a time when the market is very high there are far too many stocks being overvalued and overbought. It has become quite challenging to find businesses that are valued sensibly when the market is so high. This means that value investors need to remain smart and be skeptical of opportunities. It all comes back to an old saying that still holds true: buy low, sell high. To be greedy when others are fearful is a necessary mindset helping value investors to make the right purchases.
By: Marty Jacobs