Refining 5 Buffett’s Investment Principles of “Never Outdated”
1. Never predict the market
The author tells us that Buffett has long declared that he has no ability to predict the direction of the entire market. In other words, Buffett not only doesn’t like to predict the market by himself, but also can’t stand those who are “good at” forecasting, especially partners who express afterthoughts after market trends emerge. He called this view “bias.” Despite the name, Buffett once again stated this “bias” in his open letter to shareholders in 2020.
The letter stated: “I never like to play the game of predicting interest rates because we don’t know what the average interest rate will be in the next year, ten years, or thirty years. There may be any changes in the stock price in the future. Occasionally, the market will plummet. , The rate may reach 50% or even greater.”
He also said in the letter that those authoritative persons who like to express their opinions on the issue of “prediction markets” are revealing more of their own information rather than information about the future.
2. Invest in “Deep Value”
Investment does not depend on market trends, what should we look at? What you look at is “depth value.” This principle is also known as the “Value Investment Principle.”
Buffett’s so-called “deep value” refers to companies with excellent products and well-managed, but inconspicuous. Once he finds such a company, he will start to compare the company’s actual assets and market valuation. If the market valuation is too low, then Buffett will not hesitate to take a shot and buy the company’s stock. Buffett once said: “We buy and sell stocks not based on our views on the market’s prospects, but on our views on the prospects of a company.”
In the 2020 open letter to shareholders, Buffett talked about what kind of companies are worth acquiring. He proposed three standards:
First, the company’s net tangible capital must achieve a good return.
Second, the enterprise must be managed by competent and honest managers.
Third, the company must buy it at a reasonable price.
In reality, there are few large-scale acquisition opportunities that meet these three requirements. But Buffett thinks it doesn’t matter. He would rather wait for a good opportunity than take a shot at a bad one.
He once said this sentence: “Only when I face a really good ball, I will swing and hit a ball.”
3. Put the long line and catch the big fish
The author tells us that when measuring company performance, Buffett never cares about short-term results. He believes that three years is the “shortest period” for measuring a company’s performance. He once suggested that investors should at least pay attention to a company’s performance in the last five years.
So, what is the long-term situation of Buffett’s Berkshire Hathaway? According to the latest financial report, from 1965 to 2019, the compound annual growth rate of each stock market value of Berkshire Hathaway was 20.3%, which is more than twice the growth rate of the “S&P 500”.
If this “long-term” period is extended, from 1964 to 2019, Berkshire Hathaway’s market value growth rate is 27,44062%, which is an increase of more than 27,440 times. This number is very surprising. .
In the open letter to shareholders in 2020, Buffett once again explained the benefits of the principle of “long-term, catch big fish”: it is not only conducive to increasing the benefits of successful investments, but also conducive to reducing the problems caused by failed investments. Over time, some wrong and failed investments can be “cured.”
The rationale behind it is this: after an initial investment, over time, well-run companies tend to get more opportunities for investors to continue investing. Conversely, those poorly managed companies often enter a state of stagnation; in that state, Berkshire Hathaway’s capital to operate them becomes smaller and smaller in proportion to the total capital. It’s not a loss.
In his letter, Buffett called the acquisition a “marriage”-it may be full of longing at the beginning and stumbling in the middle, but it depends on time to tell us what the end is.
4. The performance is good or bad, you must know whom to compare with
Buffett said early on: Performance is relative. The relative meaning is to have a suitable comparison object.
The benchmarks used for comparison are the major U.S. stock indexes that can be regarded as “wind vanes”, such as the Dow Jones Index and the Standard & Poor’s 500 Index. Buffett once regarded the Dow Jones Index as a benchmark and aimed to outperform the Dow Jones Index.
If the Dow Jones Index fell by 10% in a certain year, and his investment fell by only 5%, he considered himself a victory; conversely, if the Dow Jones Index rose by 25% in a certain year, his investment increased by only 20 %, he felt that he had failed, and he would never celebrate it.
This explains why Buffett’s 2020 open letter to shareholders begins with a “comparison.” The object of comparison is another “weathervane” of US stocks-the Standard & Poor’s 500 Index.
5. Compound Interest
When Buffett explains the basics of investment to his partners, he always talks about his favorite concept: compound interest. He drew a “blueprint” to tell his partners how amazing the speed of money growth is:
“Assuming an investment of US$100,000 and an annual return of 4%, you will get US$148,024 in 10 years; at the same rate of return, after 30 years, this number will soar to US$324,337. If you increase the rate of return to 16%, Then the $100,000 will increase to $8.5 million in 30 years.” In turn, Buffett once told his partners that other neglected factors such as fees and taxes may shrink wealth significantly.
All in all: small variables can bring huge changes in the long run.