Warren’s Words of Wisdom

Warren Buffett spent several hours during the month of March being interviewed by the financial media. The interviews covered numerous topics, including the state of the economy, the pros and cons of raising the minimum wage, and the condition of the insurance industry, among many others. We excerpt here a few topics that we believe are most pertinent to readers of this letter.

Does the threat of war ever scare Warren from investing? “Well, if you tell me all of that [a World War III situation or return to the Cold War] is going to happen, I will still be buying stocks. You’re going to invest your money in something over time. The one thing you could be quite sure of is if we went into some very major war, the value of money would go down.”

Warren’s advice for those who are nervous about geopolitical tensions: “I would tell them it doesn’t change anything. If you’ve got a wonderful business of your own in Peoria, Illinois, why in the world would you sell it today because of what’s happening in the Ukraine? The same applies if you have a piece [i.e., shares] of a wonderful business or a piece of many wonderful businesses. People react too much to short-term things in the stock market.”

The only way to invest is to take the long view: “American businesses are going to be worth more money. Dollars are going to be worth less, so that money won’t buy you quite as much. But you’re going to be a lot better off owning shares of productive assets over the next 50 years than you will be by owning pieces of paper or, I might throw in, Bitcoins.”

Remember that stocks – even those of the best companies – will fluctuate. Do not let the fluctuations cause irrational behavior, otherwise you may forego the benefits of stock ownership. “Some day you will see 100,000 on the Dow. I won’t, but you will. And during my lifetime I saw it cross 100 both ways [up and down]. And I’ve had four times in Berkshire’s history where [the share price for] Berkshire has gone down 50%.”

Buffett advises investors to be long-term owners of good businesses with management teams that make intelligent long-term decisions. Owners of such companies will be rewarded – though it may take some time: “[Building] shareholder value doesn’t mean doing something to get the stock up tomorrow. Shareholder value means building the most value over a five or ten-year period that you can do with the resources. That does not mean trying to every day have the stock go up.”

“And so what if the stock goes up? I mean, that’s good for the people [shareholders] who are leaving. And it’s bad for the people who are entering. What you really want to do is [own companies where management is] building earning power, sustainable earning power over time.”

          “And so what if the stock goes up? I mean, that’s good for the people [shareholders] who are leaving. And it’s bad for the people who are entering.What you really want to do is [own companies where management is] building earning powers, sustainable earning power over time.” – Warren Buffett

It is important to own companies whose management is slowly and steadily growing earning power, and it is especially important to hold these companies for the long term. Over time, the income from ownership of such companies can even outpace the income earned from bonds. “If you are talking about income, I would bet a lot of money that income from a diversified group of stocks will increase significantly over the next twenty years. So the [news] headlines [that can strike fear into investors] will not make any difference in that. Stocks can go up and down. They always will go up and down. But American business is going to move forward over time. And the dividends will move with it.”

As for bonds, Buffett suggests that investors know exactly what they are buying if they choose to invest in muni bonds. “Some muni bonds are safe and some aren’t, just like some corporate bonds are safe and some aren’t. It depends on the debt paying capacity of the entity that owes you money.”

Generally, Buffett does not like munis at this time. “The debt’s just gotten way, way, way out of proportion to the taxable base. And the problem with a city or state is that if the math gets kind of overwhelmingly bad you set a cycle in motion where people leave and go someplace else that doesn’t have the trouble. So there’s plenty of problems ahead in municipal finance.”

And he remains steadfast in his distrust of hedge funds, in general, as a way to provide investors with satisfactory long-term returns. “Even though a great many hedge funds in recent years have not delivered high performance, they’ve delivered high fees.” The typical hedge fund charges a 2% management fee and an “incentive allocation” equal to 20% of the year’s profits. It is these huge fees that cause Buffett to believe that, on average, hedge funds make only one group wealthy – and that group is not the customer.


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