Berkshire Hathaway held its annual shareholders meeting over the weekend. The company, run by Charlie Munger and Warren Buffett (the world’s richest man, and one of my personal heroes), continues to do well, though Buffett warned shareholders not to expect continued stellar returns as in years gone by. “Anyone that expects us to come close to replicating the past should sell their stock,” Buffett said. “It isn’t going to happen. I think we’re going to get decent results over time, but we’re not going to get indecent results.”
I had a chance to attend this year’s gathering, which drew around 31,000 people to Omaha, Nebraska. I’m not a Berkshire Hathaway shareholder, but I had access to a ticket. Ultimately, I didn’t have time, and it was difficult to justify the cost. Instead, I spent part of the weekend reading some of Warren Buffett’s annual letters to shareholders, for which he is well-known. Though these letters include plenty of numbers, they’re interspersed with practical investment advice, astute observations on the economy, and lots of folksy humor. His 1997 letter contains some advice appropriate to our current volatile market.
A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
That’s the portion of the letter that is most often quoted. But I think the next few paragraphs are just as interesting because they demonstrate how he puts this philosophy into practice.
For shareholders of Berkshire who do not expect to sell, the choice is even clearer. To begin with, our owners are automatically saving even if they spend every dime they personally earn: Berkshire “saves” for them by retaining all earnings, thereafter using these savings to purchase businesses and securities. Clearly, the more cheaply we make these buys, the more profitable our owners’ indirect savings program will be.
Furthermore, through Berkshire you own major positions in companies that consistently repurchase their shares. The benefits that these programs supply us grow as prices fall: When stock prices are low, the funds that an investee spends on repurchases increase our ownership of that company by a greater amount than is the case when prices are higher. For example, the repurchases that Coca-Cola, The Washington Post and Wells Fargo made in past years at very low prices benefitted Berkshire far more than do today’s repurchases, made at loftier prices.
At the end of every year, about 97% of Berkshire’s shares are held by the same investors who owned them at the start of the year. That makes them savers. They should therefore rejoice when markets decline and allow both us and our investees to deploy funds more advantageously.
So smile when you read a headline that says “Investors lose as market falls.” Edit it in your mind to “Disinvestors lose as market falls — but investors gain.” Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other. (As they say in golf matches: “Every putt makes someone happy.”)
It’s sensible advice, but so easy to forget when you see the value of your invetments plummeting. And this is just one part of one shareholder letter. I still have more than twenty others left to read!
Though I didn’t have the time to make the pilgrimage to Omaha this year, the opportunity may present itself in the future. I hope so. I think it’d be a kick to attend this “Woodstock for capitalists”, which apparently includes an exhibit hall filled with vendors from the companies Berkshire Hathaway owns.
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