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Thursday, March 13, 2014

Learning Points From Buffett’s Recent Letter To Shareholders

by Louis Kent Lee 13/03/14 3:00 pm

The Oracle of Omaha, Warren Buffett, has recently, in his annual letter to Berkshire Hathaway’s shareholders, shared insights, which I think are good learning doctrines for anyone investing in stocks.

Investing Like You Are Buying A Business
 It’s true that buying a stock requires you to do quite a bit of homework. Many retail investors I have spoken to do their homework diligently. I mean, honestly, no one wants to lose money in the stock market. I have heard sound profitability analysis, valuation analysis but yet, most fail to do the most important homework that needs to be added into the equation; “The understanding of the business itself.”

Said best by Benjamin Graham, a man that Buffett holds highly in regard when it comes to investing, “Investment is most intelligent when it is most businesslike.”

What many fail to really understand, is the business of the company that they are investing in.

Several questions that ought to be asked are:
 • What are the specific competitive advantages that is unique to the company?
 • How big is the company’s market share?
 • How fierce is the competition scene like?
 • Is the business one that naturally have loads of geo political risk?
 • Is the business one that is very much affected by weather conditions?
 • How is the company’s competitors faring against the company?
 • What is the likelihood of recurring earnings of the company?
 • Are there any reasonable clues that point to a sustaining business moving forward?

If you can’t have a solid understanding of the business, studying numbers of the company alone, will be effectively useless, because if there is no case of business continuity, or that the competition is seriously bleeding the company, the numbers that you based your analysis on, will probably be non-representative after all.

Buffett’s understanding of the companies he have invested in is so solid, to the extent that he does not care about the daily valuations of the companies, nor even macro opinions and predictions, which so many media outlets blast us with.

Market Noise And Crisis Situations
 Market noise is something that is impossible to avoid. But on the part of how much it might affect you, Buffett strongly believes that “forming macro opinions or listening to the macro or market predictions of others is a waste of time”.

Trust me, not as easy as it sounds. However, Buffett’s statement which hit me the most, was that “listening to macro or other market predictions is a waste of time because it may blur your vision of the facts that are truly important.”

He revealed that had he owned a 100 percent of a solid business even during the 2008 financial crisis, it would have been a foolish consideration to dump it. Essentially, if the investment rationale is done in a solid way, and the business will continue being a solid business, whatever happens outside the scope of the business, will be of no importance to him.

 It is endearing how personal the Oracle’s tone of voice is in his letter to his shareholders, and more so the lessons embedded within letter itself.

The takeaways are practices that Buffett abides by diligently and effortlessly, which, admittedly, takes real discipline for others to really follow through.

As Buffett is known for value investing, his thoughts on speculation were both funny and insightful, and I shall end it off with his quote on speculation.

“I am unable to speculate successfully, and I am sceptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a good reason to buy it.” – Buffett

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