Warren Buffett’s Berkshire Hathaway Inc.’s Annual Shareholders Letter was released last Saturday morning. This letter has been a required reading for me for as long as I can remember. There are always lessons to be gleaned from his annual message which can help all of us to be better investors and smarter financially.
Berkshire Hathaway grew in prominence based on Buffett’s stock holdings of many large US companies during the 1970s through the early part of this century. Berkshire has grown due to these investments and their huge insurance companies. Over the past decade, he has focused more on buying large companies outright, as well as making many opportunistic investments, particularly during times of crisis, such as during the financial meltdown of 2008-09.
What are the lessons from Buffett that impact you and your financial life?
Focus on the long term positive progress, not on negative talk
After his opening summary of the past year, Buffett commented on the negativity that the current election year is having. While politicians continue to talk about our country’s problems, he feels “many Americans now believe that their children will not live as well as they themselves do. That view is dead wrong. The babies being born in America are the luckiest crop in history.” I completely agree, as the constant political negativity weakens people’s confidence in our country. The economic strength reflected in real data is much more relevant than the political banter.
Buffett explained that output per American is about $56,000 (called GDP, or Gross Domestic Product), which is 6X greater than when he was born in 1930. While he acknowledges that there are certainly income gaps within our society which need to be addressed, the overall trend is clearly positive.
As our economic growth continues to expand, even at 2% per year, that exceeds the population growth of .8% per year. Over the next 25 years, he says that should lead to gains of almost 35% in real output per person in the US, or a gain $76,000 annually for a family of four.
He stressed the positive long term increase in the standard of living in the US. Buffett states that “all families in my upper middle-class neighborhood regularly enjoy a living stardard better than that achieved by John D. Rockefeller, Sr. at the time of my birth.” He cites advances, which many of us take for granted, in “transportation, entertainment, communication or medical services.”
Be positive and confident
Buffett is clear in his conviction to be positive about the future. “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs. America’s social security promises will be honored and perhaps made more generous. And yes, America’s kids will live far better than their parents did.”
We feel this confidence for the long term is critical to be a successful investor. We have emphasized that volatility and market downturns are part of stock market investing. Significant downturns happen approximately every 5 years. You need to be prepared for these, and be able to stick to your investment plan, to benefit in the long term rewards of stock market investing. Faith and confidence in the future are very important.
Keep investing, in good times and bad
Buffett continues to purchases companies, including a $32 billion aerospace components maker. He agreed to this transaction in August 2015, just as the market was declining last summer, and closed on the deal in early 2016, despite the market decline in January 2016. Berkshire’s various subsidiaries purchased 29 companies during 2015 for a total of $634 million (he calls them bolt-on acquisitions, as they add value to his existing subsidiaries).
Berkshire’s companies invested $16 billion in property, plant and equipment during 2015, of which 86% was in the US. His companies are clearly investing for the long term with the expectation of greater returns in the future, regardless of short-term unknowns and volatility.
Buffett has not been as successful recently in individual stock investments
Warren Buffett is clearly recognized as being one of the top investors of our lifetimes, as he has built an extraordinary conglomerate of companies and stock holdings.
In preparing this essay, I reviewed the top stocks he has held for many years, as well as some more recent acquisitions. The results are quite startling, and certainly not as spectacular as I would have thought. Of his top 4 stock holdings since 2005 and 2010 (the last 5 and 10 year periods), 3 of the 4 of these stocks have vastly underperformed the S&P 500, the index of the 500 largest US companies, which Buffett feels is the benchmark he is to be evaluated against.
His top stock holding in 2005 was Coca Cola. Since then, its 10 year performance was better than the S&P 500, but in the past 5 years, it has trailed the S&P’s 11% annualized gain by over 2% per year.
His current top stock holding is now Wells Fargo. Since he vastly increased his holding in Wells Fargo over the past 5 years, the stock is up 10.51% per year, on an annualized basis. Sounds great, right? However, that is nearly even with the S&P 500, so his Wells Fargo holding is really only equaling the benchmark.
His other large holdings have vastly underperformed. IBM, which he began accumulating in 2011, is still below his original cost and trails the S&P 500 by 11.5% per year over the past five years. American Express, which he has owned for decades, trails the S&P by 4%, 5% and 2% per year, respectively, over the past 5, 10 and 15 year periods. While not as large a holding, Buffett has accumulated $4 billion of Wal-Mart stock since 2008. Again, this stock has trailed the S&P 500 over the past 3 and 5 years by dramatic amounts.
What is my conclusion?
This shows how difficult it is to succeed over the long term in selecting and holding individual stocks. This data, while not complete for Buffett’s career and all his stocks, certainly shows that even for an “expert,” it is very difficult to vastly outperform the stock market, let alone even matching the index. Buffett’s major individual stock holdings have not done that in the last 5-10 years.
This is further evidence of why we feel so strongly about our investment philosophy of utilizing broadly diversified indexes, which track various benchmarks with extremely low costs. We are confident that our investment strategy is the best way to capture the long-term expected returns of the stock market with the greatest chance for success. As even Warren Buffett has recently shown, trying to pick a handful of individual stocks just isn’t the best approach.
Disclosure: Brad Wasserman, author of this blog post, owns a small number of Bershire Hathaway shares, which was purchased to enable me to attend the Berkshire annual meeting. All my other stock investments are in DFA or Vericimetry mutual funds, as we recommend to our clients.