Achieve Investment Success By Thinking Like a Business Owner

“Investment is most intelligent when it is most businesslike” - The Intelligent Investor by Benjamin Graham

 

 

The 2013 Berkshire Hathaway annual letter to shareholders was issued recently and as is always the case, it is loaded with investment insights and tips from the Chairman, Warren Buffet.   You can find it on page 5 of the Berkshire Hathaway Annual Report

 

Each year I am amazed at how Mr. Buffett is able to communicate his company’s progress, often with folksy and informative background stories about some of the diverse companies in the Berkshire Hathaway portfolio as well as the people who run these companies.  The consistent theme of course is the focus on long-term value created by these companies and the patience exhibited by Mr. Buffett and his management team.   Although I always enjoy this section of the letter, it is often Mr. Buffett’s investment fundamentals section, this year entitled “Some Thoughts About Investing”, that I find most educational and inspiring. You can find this on page 19 of the attached link to the 2013 annual report.

 

I have spent quite a bit of time going through the thoughts about investing section and I have pulled what I feel are the most impactful takeaways that benefit me as a steward of my clients’ wealth and anyone who is a long-term investor looking to build wealth for retirement or grow income during retirement.   I hope you find these as helpful and interesting as I do.  Direct quotes from the letter will appear in bold italics.

1.     Put in place a plan and keep it simple.

 

“You don’t need to be an expert in order to achieve satisfactory investment returns.  But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well.  Keep things simple and don’t swing for the fences.”

 

Once again Mr. Buffett, whether in print or electronic media articulates a consistent never wavering approach to selecting great businesses and acquiring them at reasonable prices based on the future value they will deliver to Berkshire Hathaway. 

2.     Focus on the future value derived from your portfolio not the day to day changes in value.

 

‘Focus on the future productivity of the asset you are considering…..If you instead focus on the prospective price change of a contemplated purchase, you are speculating….Games are won by players who focus on the playing field, not by those whose eyes are glued to the scoreboard”

   

The message here is understand what you own and why you own it and think like a business owner.  If your thesis is still valid, then stay with your investment to reap the rewards of long-term value creation in the form of dividends and unrealized gains.  For many of our retired and soon to be retired clients, we recommend an appropriate portfolio with a focus on “dividend growers”.  In 2013, 93% of the Canadian and US companies in this portfolio increased their dividends an average of 8.5%.  We constantly remind our clients to focus on growth of income and not the day to day or month to month change in market value.

3.     Do not react to macro predictions or market pundits.

Forming macro opinions or listening to the macro or market prediction of others is a waste of time.  Indeed, it is dangerous because it may blur your vision of the facts that are truly important.”

 

To illustrate this point with clients, I often highlight many of the holdings in the dividend growers portfolio such as Honeywell, Johnson and Johnson, McDonalds and TD Bank.  The best way to demonstrate this is to overlay a chart of macro events dating back 10, 20 or even 30 years with the dividends paid by these great businesses over that timeframe.  None of the companies missed a payment despite the turmoil and many managed to increase their dividends every year despite the turmoil in the economy and the markets.  Of course, if the investor sold because of the headlines they would have missed out on this incredible wealth creation.

4.     The liquidity offered to owners of publicly traded businesses can be both a blessing and a curse depending on your behaviour.

 

“Owners of stocks too often let the capricious and often irrational behaviour of their fellow owners cause them to behave irrationally as well…..Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of “don’t just sit there, do something”.

 

Mr. Buffett discusses investments he made many years ago in a farm and apartment building to illustrate the difference in many investors’ mindset of farms, real estate and their business (illiquid investments) vs. their stock investments (liquid).  Because we are able to access intraday and closing prices for our publicly traded stock investments, we are often tempted to act on the liquidity provided just because we can.   Once again if we think like an owner and we understand what we own and why we own it, we should be able to take advantage situations when many investors act irrationally resulting in lower prices for the businesses we own. 

 

I hope you find the link entertaining and informative.  I am happy to discuss how this approach to investing can benefit you and your family.  As always, we are here to help.