Any time Warren Buffett's Berkshire Hathaway releases its latest list of quarterly holdings, the media will set out to dissect every one of Berkshire's moves to try to glean some insight into what the company - and, by extension, the world's most famous investor - is doing.
Examining his latest trades is always interesting and, since one of my Guru Strategy computer models is based on his approach, I have previously done just that in other publications. But what really intrigues me in terms of Buffett-related news isn't his specific buys and sells; instead, it's the advice he offers to his shareholders and other investors, particularly during times of uncertainty.
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Given all of the uncertainty we've seen lately in global markets, I recently scoured some of Mr. Buffett's past shareholder letters for some of his sage, and often timeless, advice. Here's a sampling of what he offered in three other years marked by uncertainty: 1975, 1990 and 2000.
Focus on the business, and the long term In 1975, the market and economy both had strong rebounds after a nasty recession and bear market. Berkshire lagged, but Mr. Buffett was far from panicked. He reiterated his and Berkshire's long-term approach to investing. "With this approach, stock market fluctuations are of little importance to us - except as they may provide buying opportunities - but business performance is of major importance," he wrote. "On this score we have been delighted with progress made by practically all of the companies in which we now have significant investments."
The message was clear: Mr. Buffett knew that the market can be fickle from year to year, and that almost no one can predict how investors will behave in the short term. But, over the long term, he knew that the stocks of good businesses, if bought at reasonable prices, would more often than not fare well. He thus stuck to analyzing businesses, rather than trying to guess the market's direction, and it paid off, as the market eventually realized the value of the businesses in which he invested. From 1976 to 1979, Berkshire's stock returned an average of 77.5 per cent a year, while the S&P 500 gained 10.2 per cent a year.
'Good' is better than 'cheap' In 1990, the market and economy were again scuffling - and in some ways their problems were eerily similar to those seen during the recent financial crisis. Consider Mr. Buffett's words back then: "Mistakes have been the rule rather than the exception at many major banks," he wrote. "Most have resulted from a managerial failing that we described last year when discussing the 'institutional imperative': the tendency of executives to mindlessly imitate the behaviour of their peers, no matter how foolish it may be to do so. In their lending, many bankers played follow-the-leader with lemming-like zeal; now they are experiencing a lemming-like fate."
While many bank stocks had been pummelled, Mr. Buffett said Berkshire wasn't interested in buying up "cheap" bank stocks if the firms behind those stocks were poorly run. Instead, it would buy into well-managed banks at fair prices, bank such as Wells Fargo, which became a huge winner for Berkshire. Mr. Buffett also made it clear that short-term market movements weren't going to sway him; Berkshire neither bought nor sold any shares of five of its top six holdings, and it added significantly to the sixth.
Just as it had in the mid-1970s, his discipline and steadfast belief in buying up shares of quality firms paid off. From 1991 to 1994, Berkshire's annualized stock gains were 32.3 per cent. The S&P 500's gain? It came in at 12.4 per cent.
Follow the numbers, not the crowd In his 2000 letter, written as the market and economy again were stumbling amid the Internet bubble burst, Mr. Buffett again offered some wisdom that rings so true today. "A pin lies in wait for every bubble," he wrote. "And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street - a community in which quality control is not prized - will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest."
"At Berkshire," he added, "we make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. … Instead, we try to apply Aesop's 2,600-year-old equation ['A bird in the hand is worth two in the bush']to opportunities in which we have reasonable confidence as to how many birds are in the bush and when they will emerge."
Again, the message was clear, and echoed the advice Mr. Buffett offered in 1975 and 1990: When others are consumed with euphoria as markets rise and panic when they fall, he is focused on the cold, hard facts: what a business is worth, and how much he can get a piece (or all) of that business for. Once again, that disciplined approach paid off in the wake of the 2000 meltdown. Over the next two years, the S&P lost an average of 17 per cent a year, while Berkshire's stock and book value both increased.
While these three Buffett-inspired lessons were offered anywhere from 10 to 35 years ago, they ring as true today as they did back then. Following those lessons might have helped investors avoid a good deal of the damage caused by the 2008-09 meltdown. As we move through the market's latest round of problems, investors would be wise to heed Mr. Buffett's words once again.