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Warren Buffett Holds Forth

The Sage of Omaha is making plans.

Thanks to his 2013 letter, one of a series released annually by Buffett’s company, Berkshire Hathaway, we have at least a clue what he’s up to.

If you’re one of the five people on the planet who don’t know who this man is, here goes:

Warren Buffett has been studying and working in investments for many decades, bolstered in part by his mentor (among others), Ben Graham, and Buffett’s partner, Charlie Munger. His company, Berkshire Hathaway, has consistently returned profitsThis past year, its earnings were modest: a little more than 18%. (Buffett was frustrated by that; the overall market earned more.)

     There are other brilliant financial minds out there — but few, if any, are as modest, or frugal. Buffett’s favorite foods include cheeseburgers, root beer floats and Diet Coke. (Okay, and an occasional T-bone steak.) He lives inthe same 5-bedroom house he bought in 1958 for $31,000 and change. And in spite of a net worth in the billions, he still earns the same salary at Berkshire Hathaway as 25 years ago: $100,000 yearly.

      He’s counted a long line of famous people, including Bill and Melinda Gates and the late Katherine Graham, among his friends. But Buffett has also spent time with students and other junior investors,  and is a regular (and accessible) face at Berkshire’s annual stockholders meeting.

     Considering all the brouhaha, though, Buffett remains remarkably steady, both in his outlook and long-term response.

     And what is that approach?

Look for value — and hold the course. 

Normally, we wouldn’t even know the contents of Buffett’s annual letter until after the shareholders’ meeting on May 3rd. He did something different this year, though, and released an excerpt to Fortune magazine. It’s incomplete, of course. But what it does reveal is fascinating.

*The market is going to hold relatively steady. 

“Exactly what’s been going on since the fall of 2009 continues,” Buffett said in a recent interview that echoed his annual letter. “Moderate but consistent growth for four and a half yearsIn terms of what we see, it’s been almost a straight line, but not at the kind of slope that people would like. But not flat either.”

“We haven’t gotten wildly optimistic and we haven’t gotten wildly pessimistic,” he added.

*”Focus on the future productivity of the asset you are considering.” Both of Buffett’s examples are real estate: a farm not far from Omaha, and a commercial property near New York University. Both pieces were purchased for a reduced price, thanks in great part to recessions. Both were chosen for their prime locations, as well as potential for future earnings.

*Look for investments that promise a steady profit — if it’s only a small one. Use past earnings as a gauge– but don’t expect to get them. Instead, focus on the current value of the asset, as well as what it could earn. (Buffett shoots for at least 10% annually.) Both the real estate properties mentioned in the previous paragraph are following this pattern — they continue to rise in appraised value, and produce current income, as well.

*You may lose money at first. Don’t worry. Berkshire Hathaway’s 50% purchase of Heinz is one of the reasons the fund did not gain as much as it could have, though Heinz’s earnings are projected to increase. It also  follows one of Buffett’s favorite strategies: investing in snack foods. (Not to mention free ketchup for Buffett’s beloved french fries and cheeseburgers.)

*You’ll make mistakes. The other big loser last year for Berkshire was Energy Future Holdings bonds. Buffett acknowledges he goofed on this one: “Most of you have never heard [of EFH]. Consider yourselves lucky; I certainly wish I hadn’t.” He bought $2 billion of the company’s debt without consulting with Charlie Munger. (“That was a big mistake.”) Total loss: $873 million.

*”When promised quick profits, respond with a quick ‘no.'” Educate yourself, follow the path you know best. Use the tenets mentioned as your guide. “The first rule of investing is don’t lose money,” Buffett often says. “The second rule is: don’t forget Rule No. 1.”

     What’s most important, after all, is steady growth and a long-term approach. When Buffett brings up the subject of his will (not surprising, considering he’s now 83), it’s still on his mind:
     “All of my Berkshire Hathaway (BRKA) shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate. My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s. VFINX) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions, or individuals — who employ high-fee managers.”
[Interestingly, we recently discussed index funds on Midlife Finance. One of those recommended: Vanguard’s 500 Index, the same one Buffett is referring to here.]

In a recent interview on Squawk Box, Buffett’s “don’ts” advice included many of his basic tenets, but added a surprising one: bitcoins. “It’s not a currency. It does not meet the test of a currency. I wouldn’t be surprised if it’s not around in 10 or 20 years. … It is not a durable means of exchange. It’s not a store of value. … It’s been a speculative—a very speculative—kind of Buck Rogers-type thing.”

The Great One’s full letter will be out in May. Meanwhile, you can learn more by exploring some of his best-known quotes, as well as a list of  books about Buffett. (My favorite: The Snowball by Alice Schroeder.)

“The stock market just offers you so many opportunities, thousands and thousands of different businesses. You don’t have to be an expert on every one of them. You don’t need to be an expert on 10 percent of them even. You just have to have some conviction that either a given company, or a group of companies are likely to make more money five or 10 or 20 years from now than they’re earning now. And that is not a difficult decision to come to.”

One Response to Warren Buffett Holds Forth

  1. A great approach to investing. The thing that really amazes me though is still living in the same house. Think about how much most pay each month for a mortgage, then buy another house and restart the process all over again. This man paid off his mortgage and could have saved that amount (granted a 30yr loan on $31K isn’t a ton) for the rest of his life. Think about how much that would grow to. That should inspire others to do the same. Forget about his income, look at how simple he lives his life and how happy he is.

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