Warren Buffett is the chairman of Berkshire Hathaway, a US-listed company, that owns majority or significant minority shares in companies like WalMart, General Motors, Procter & Gamble, American Express Bank, Coca Cola, Heinz, IBM among others. Over the years, Buffett and his team has built a portfolio that has generated steady returns to investors of the company. So much so that the annual letter Buffett writes to shareholders as chairman of the company has become a part of the investment literature world over.
Here are some pearls of investment wisdom from his 2013 letter to shareholders:
Investors should invest on the basis of the underlying value of the company. This is called value-investing. Value-investing ensures that you will never have to indulge in panic selling as they will never need to sell no matter the market condition. This means, even in times of recession, value investing will always help. “My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following – 1987 and 1994 – was of no importance to me in making those investments,” he writes.
“You don’t need to be an expert in order to achieve satisfactory investment returns,” Buffett said. However, he added, an investor must recognize his/her limitations and accordingly plan the investment style. It always helps to follow a simple strategy, and stick with it even when you are tempted to do otherwise.
Investors should not buy an asset for its present profitability, according to Buffett. An increase in share price in the recent past is also not reason enough to buy. It is the probably profitability in the future that matters. This is perhaps the reason why stock markets often look to the future events and react today.
Investors should not get distracted by daily fluctuations in the asset’s price and valuation.“With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard,” he wrote.
Investors should not fear when the market falls. This is the time when assets are available cheaply, and hence, the right time to invest more. “A climate of fear is your friend when investing; a euphoric world is your enemy,” Buffett wrote.
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