One of the reasons so many people hang on Warren Buffett’s every word is that his no-nonsense, keep-things-simple approach to investing has proved consistently successful over decades. Regardless of market conditions and technological change, the Sage of Omaha has managed to produce returns that the world’s highest paid asset managers envy.
Taking a leaf out of Buffett’s book is Lourens Rabé, a young and hugely talented investment analyst at Seed Investments in Cape Town. In this excellent piece, he introduces new investors to Buffett’s investment philosophy.
Lourens has that rare ability to remove the mystery and complications from stock market investing. We’ll be publishing a lot more from Lourens and others of his ilk, so check in to biznewz.biz regularly or sign up to the weekly Biznewz newsletter (see below) so that you don’t miss out on the latest business and investment insights. – JC
By Lourens Rabé
During my honours year at the University of Cape Town we had to read and summarise all of Berkshire Hathaway’s annual shareholder letters. This was most likely to have the philosophy of value investing indoctrinated into our minds, as it’s a widely utilised investment philosophy – and one you hear most at investment presentations and while studying at university.
Value investors buy companies at prices below their true value. Company value is determined through fundamental bottom-up analysis. Typical value indicators are companies with strong balance sheets, low price-to-earnings (PE) and price to book (PB) ratios and high dividend yields.
Unfortunately, while value investing seems simple, it’s not always that easy and cannot be done 100% through ratio analysis as one also needs wisdom and insight. For that reason it’s best to go back to the source of value investing. Benjamin Graham, a former professor at Columbia business school, is considered to be the father of value investing. If one wants to get into the heart and soul of value investing, two of Graham’s well known books The Intelligent Investor and Security Analysis are a good place to start.
Warren Buffett is his most famous student, and his nuggets of wisdom are found in his annual letters to his shareholders. One can learn a lot from the “Oracle of Omaha” and I thought this to be insightful information to share.
Warren Buffett was born in 1930, and at the age of 83 he is currently still the Chairman of Berkshire Hathaway Inc., the company he took over by way of a share buyout. Interestingly, the company was not started as an investment house; rather formed through two textile companies merging in 1955. Warren Buffett started buying shares in the company in 1962 and in 1964 he was the majority shareholder. Today it operates as a multinational investment holding company.
Some of the highlights found in his letters are his thinking and rationale behind the decisions he makes. Warren Buffett makes investing sound very simple:
- Use your logic.
- Work hard.
- Be ethical.
- Enjoy what you do, that way you won’t have to work one single day of your life.
- Invest into businesses where tailwinds prevail rather than headwinds.
- Place a lot of weight on measuring managerial economic performance by a company’s return on equity (ROE).
- Buy shares to become a mutual owner in the company – and thereby aim to remain a shareholder forever.
- Measure a company’s performance over the long term – not any given day.
Mr Buffett tries to get a significant stake in a company since; “If something’s not worth doing at all, it’s not worth doing.” he admits that he made mistakes in the past by acquiring businesses – mostly due to miscalculation. However, it is easier to correct your wrongs when you have controlling interest in the company. While investors and managers must place their feet in the future, their memories often remain plugged into the past.
Some of his lines of wisdom are indeed very catchy, for example: “Like virginity, a stable price level seems capable of maintenance, but not of restoration”. Or the Noah principle: “Predicting rain doesn’t count, building arks does.”
The full collection of his letters is available at http://www.berkshirehathaway.com. Judging by the appearance of the company’s website (which looks like something from the 80s) – it is clear that Warren Buffett completely skipped the dotcom bubble.
However, there is much to learn from this man. It is this kind of insight that makes Warren Buffett the most successful investor of the 20th century.
* Lourens graduated from the University of Stellenbosch at the end of 2009 with BCom (Law) and studied further to complete BCom (Investment Management) in 2011. In 2012, Lourens completed his BCom (Hons) in Financial Analysis and Portfolio Management at the University of Cape Town whilst working working as a junior investment analyst at Seed Investments.