New Investing Insight from Warren Buffet

Markets were a bit of a seesaw Friday and were up more than a percent in the mid day, but dropped back in the last hour of trading on the increasing tensions in the Ukraine.  It was still a record close for the S&P 500.

The second estimate of fourth quarter GDP was released in the morning and markets shrugged off the downward revision from the first estimate of 3.2 percent to 2.4 percent.


I don’t think that there’s much doubt that Warren Buffet is the world’s greatest investor.

According to the most recent Forbes list, he’s the fourth wealthiest person on the planet with a personal net worth of $53.5 billion.  The others ahead of him, Carlos Slim, Bill Gates and Amancio Ortega, earned their fortunes founded businesses.

This weekend, his company, Berkshire Hathaway, released its annual report and his Chairman’s letter is always worth reading.  Here’s a link if you’re interested.

In addition to the expected updates about Berkshire’s businesses, Buffet always offers some pearls of wisdom and this year was no different.

In a section titled ‘Some Thoughts About Investing,’ Buffet has some particularly good nuggets.

$1·      ‘Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard.’  He’s saying that it’s not important to watch the daily valuations of his investments – a point that he repeats a few times in this section.

$1·      ‘Forming macro opinions or listening to the macro or market predictions of others is a real waste of time.’  I couldn’t agree more.  I have few macro opinions but they don’t really inform my investing decisions.

$1·      ‘A climate of fear is your friend when investing (emphasis is his); a euphoric world is your enemy.’  This is a variation of his long well known advice to be fearful when others are greedy and greedy when others are fearful.

$1·      ‘In the 20th Century, the Dow Jones Industrials index advanced from 66 to 11,497, pay a rising stream of dividends to boot.  The 21st Century will witness further gains, almost certain to be substantial.’  As usual, Buffet is bullish on stocks, which he correctly just thinks of as ‘small portions of businesses.’

Interestingly, near the end of this section, he writes that when he dies, a trust for his wife will receive a cash bequest.  He is leaving instructions to the trustee to ‘put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund (I suggest Vanguard’s).’

Buffet then writes that the 1949 edition of his favorite investing book, The Intelligent Investor by his mentor Ben Graham, recommends a railroad stock that was earning $10 per share and was selling for $17 per share.

It turns out that the railroad in question was Northern Pacific, now a part of BNSF, the railroad that Buffet bought in 2009.  Buffet writes that when he read the book Northern Pacific had a value of $40 million and now it earns that much in profit every four days.

That thought lead me back to something he wrote at the beginning of the letter, where Buffet writes about buying BNSF, which he said at the time was an ‘all in-wager on the economic future of the United States.’  Keep in mind that in 2009, the economic future looked bleak, we were just at the beginning of pulling out of the 2008 Financial Crisis.

Today, he writes that this ‘kind of commitment was nothing new for us: We’ve been making similar wagers ever since Buffet Partnership Ltd. acquired control of Berkshire in 1965.  For good reason, too.  Charlie and I have always considered a ‘bet’ on ever-rising US prosperity to be a very sure thing’

Hear, hear, Mr. Buffet, I couldn’t agree more.  Thank you for another year of investing wisdom.