Famed investor Warren Buffett is calling it a career, announcing at the recent Berkshire Hathaway shareholder gathering that he plans to retire at the end of this year. During his 60 years at the helm of his investment holding company, Buffett plied his trade in the most public of ways, always quick to offer bite-sized bits of investing wisdom.
What follows are insights about his unrivaled investing results and some of the lessons for everyday investors that he shared along the way.
Revolutionary approach, stunning results
Buffett’s success as an investor is legendary. Consider this: according to The Wall Street Journal, if you had invested $100 in Buffett’s Berkshire Hathaway stock in 1965, it would have been worth a mind-blowing $5.5 million at the end of last year. By contrast, a $100 investment in the S&P 500 would have grown to just $39,000. Is it any wonder that when asked to name the greatest investor of all time, the name that comes most readily to most people’s minds is Warren Buffett?
What did Buffett do differently from most investors? What was the secret to his success? Many have weighed in on such questions. Some point to his patience. He would keep large portions of his portfolio lingering in cash until he could find the right opportunities. He usually spotted those opportunities, and deployed that cash, during market declines, leading to one of his most famous quotes: “Be fearful when others are greedy and greedy when others are fearful.” Some emphasize his work ethic. He would spend hours poring over detailed financial reports in a quest to find undervalued companies.
One especially contrarian decision may have had the greatest impact of all. Buffett determined early on that Berkshire Hathaway would not issue dividends, a decision that flew in the face of conventional 1960s finance industry wisdom. Instead, he would reinvest profits into buying more companies.
As noted on the YWR investment blog, “Buffett’s insight was that paying dividends exposed investors to taxes on those dividends. There was tax leakage. Over time, the compounding engine was stronger if Berkshire retained that money and reinvested it for the shareholder. The value would be captured through the Berkshire Hathaway share price, not the dividends…. This ‘no dividend ever’ company would go on to…outperform all other companies in the S&P 500 for the next 60 years!”
Lessons for the rest of us
You probably don’t own a publicly-traded investment holding company, have billions of dollars to deploy when opportunity strikes, or the time (or skill!) to pore over detailed financial reports. Still, there’s much that you can learn from Warren Buffett. Throughout his long career, he doled out plenty of investing lessons, usually in pithy statements made to the press or in his annual Berkshire Hathaway shareholder letters. Here are several examples.
“If you don’t find a way to make money while you sleep, you will work until you die.”
Buffett made his first stock investment when he was just 11 years old, quickly discovering the benefits of putting money to productive use.
“Risk comes from not knowing what you’re doing.”
Some have equated stock market investing with gambling, and indeed, it can be similar. But not for those who adhere to certain timeless principles — diversifying holdings, keeping emotions in check, and maintaining a long-term perspective. If you “know what you’re doing,” the stock market represents most people’s best opportunity to build wealth.
“You should never test the depth of the water with both feet.”
Investing is inherently a risk-taking proposition. The wise investor is careful not to take too much risk.
“Only when the tide goes out do you discover who’s been swimming naked.”
Buffett’s comment was aimed at businesses that take on too much debt when economic times are good, only to be exposed for their excessive leverage when conditions worsen. It can be equally applied to individual investors who may be tempted to take on more risk than they should when the market is booming.
“In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
A related quote:
“For 240 years, it’s been a terrible mistake to bet against America, and now is no time to start.”
Two of the most consistent themes in Buffett’s annual shareholder letters were his endless optimism about American businesses and his almost giddy enthusiasm for the opportunity to become a part (or, in his case, sole) owner of some of those businesses through investing.
“Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard.”
In other words, follow your investment process and let the outcome take care of itself.
“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
Like most experienced investors, Buffett paid no heed to those claiming to know what the market will do next.
”Success in investing doesn’t correlate with IQ.... What you need is the temperament to control the urges that get other people into trouble in investing.”
There are many risks that come with the territory of investing. There’s market risk, inflation risk, sequence of returns risk, longevity risk, and more. But the single biggest risk for an investor is letting emotion guide decision-making.
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
We don’t automatically encourage members to add significantly to their portfolio when the market is falling, but we absolutely encourage them to continue dollar-cost averaging into the market through thick and thin.
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
When making hiring decisions, Buffett placed an especially high value on integrity. His comment is good life advice.
“If you’re in the luckiest 1% of humanity, you owe it to the rest of humanity to think about the other 99%.”
Buffett famously said that he won the “ovarian lottery,” humbly attributing much of his success simply to having been born in America to his particular parents at that particular point in history. He has pledged to give away 99% of his wealth, with all of his shares of Berkshire Hathaway stock given toward philanthropic purposes within 10 years of his estate being settled.
“Investing is a lifelong journey. Stay disciplined, keep learning, and never stray from the principles that have built enduring wealth.”
Amen to that!
