Three Things We Should Learn From Warren Buffett


As is always the case, the release of Warren Buffett’s annual letter to shareholders of Berkshire Hathaway (BRK-A, BRK-B) has generated a lot of interest. Buffett is a legendary investor who has done what most of us aim to do; he has invested successfully over the long term and ridden out the market’s ups and downs. The letter and the subsequent comments of Mr. Buffett are always filled with good advice, but this year there seems to be three things that stand out.

1. Don’t Reach for Value, and Do Your Research: It is well known that Buffett is, based on his vast experience, bullish for U.S. stocks in the long term. He maintains that capitalism begets innovation, productivity improvements and growth, so the inexorable path of equities is upward, and history supports that contention. He is, therefore, always looking to invest, but one of the headlines to come out of this year’s letter is that Berkshire is sitting on $116 billion in cash.

Many have drawn the short-term conclusion from that that stocks are overpriced, but that is not the thing that we should be concentrating on. Instead, the lesson from the huge pile of cash is that successful investors don’t just buy for the sake of buying. They research companies, looking for solid financials and growth opportunities.

Value matters, particularly over decades, and fully priced stocks offer a more limited upside if nothing else. In investing, patience is a virtue, and as recent events have shown, opportunities to buy at more reasonable valuations will usually come, either from a correction or from a period of slowing price increases as growth catches up with valuations.

2. Keep Politics Out of Investing: Buffett is well known as being somewhat left-leaning in terms of American politics and was an open and vocal supporter of Hillary Clinton in 2016. That, however, didn’t stop him from acknowledging the positive effects for Berkshire of the recent tax cuts and reforms, nor does it lead to him dictating where Berkshire should be putting its money based on his political views.

In an extended interview with CNBC’s Becky Quick this morning, an event that has become a tradition following the shareholder letter’s release, the “Sage of Omaha” made it clear that there Berkshire has no injunction against investing in gun manufacturers, for example, and does invest in things of which he personally disapproves such as cigarette distribution and sales. To him, making money is his job, and he does not let his political views get in the way of that or stop him giving credit where it is due.

For some, that may be too cynical a way of looking at investing, and, of course, they are entitled to put their money wherever they want. They should do so, however, in the knowledge that by doing so they are missing some opportunities, and potentially limiting their returns.

3. Branding and Good Management Matter: One of the things that we learned over the weekend is that Berkshire’s biggest investments over the past year have been in Apple (AAPL). When asked about that in the above-referenced interview, Buffett gave two solid, informative reasons.

First, he said, he likes and respects Tim Cook, the Apple CEO. Buffett is the opposite of an activist investor. He does not buy a company to “improve” its management, he buys companies whose management he trusts. If that is important to somebody with the potential power of Warren Buffett, it should be even more important to relatively powerless investors like you and me.

The second reason he gave was that he believed that the Apple brand was, as he put it, “sticky.” He himself famously still uses a flip phone, but that doesn’t mean that he cannot appreciate the power of the Apple ecosystem. He sees family members and employees who faithfully use Apple products and understands the stability and opportunity that gives a company over time.

The thing is, whatever you may feel personally about Warren Buffett, it is hard to argue with success. Over the years, he has bought into companies with good management and branding and companies that represent value, regardless of any political considerations. Trends in investing will come and go, but those time-tested habits have proved their worth, and we should all take notice.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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