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My Weekend with Warren Buffett, Part 3

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IMG_4603This is part 3 of a 3 part series about my weekend at the Berkshire Hathaway annual meeting. Part 1 was an overview of the meeting while in part 2, I discussed the famous question and answer session. Today’s post is about what I felt was the big lesson of the weekend.

Ducks!

Remember to tune in tomorrow for the duck giveaway. I have 2 sets to hand out. One set will go to a random commenter while the other set will be given away in a contest. Johnny Moneyseed will serve as the guest judge and will pick the winner.

The Big Lesson

Whenever I tell people that I went to the meeting, the first thing people ask is “What were Warren’s predictions?” This was also the most common question at the meeting. People repeatedly asked Buffett and Munger to ‘read the tea leaves’ and let them know what’s in store for the economy. Buffett’s and Munger’s answers could be summed up in 3 words:

We don’t care.

Some of their actual answers were:

  • Munger: We don’t care about the next 3-5 years. We are building long term momentum.
  • Buffett: The world is given to excesses which have consequences. What happened in 2008 will happen again, but the cause will be different. It is the cycle of things. Always try to stay sane when other people are going crazy.
  • Buffett: The person born today with a passion for investing is going to do very well.
  • Buffett: In 2008 and 2009, lots of smart people were sitting out.

Another quote from Buffett summed things up perfectly:

“If people try to time the markets, they’ll do very well for their brokers and not for themselves.”

The philosophy of Buffett and Munger stands in stark contrast to almost every other investment ‘guru.’ Buffett and Munger buy strong companies with big moats and stay with them for the long term. They don’t care about market fluctuations. This is different from just about everyone else out there. Don’t believe me? Flip over to your favorite financial website. I checked out Marketwatch. One article talks about how ‘Why stocks aren’t overbought.’ Another suggests that it may be time to jump out of the markets soon.

Try to beat this!
Try to beat this!

So, who is correct; the boring Buffett philosophy or all of these other prognosticators telling you to time the market? I’ll help you out. Take a look at page 1 of the Berkshire annual letter. There are lots of incredible numbers in there, but one really stands out: 19.7%. This is Berkshire’s annual return from 1965 to 2012. Compare that to the 9.4% return of the S&P 500 over the same time period. Let’s put the 19.7 number in perspective:

  • A$10,000 investment with no future contributions turns into $1,000,000 in about 24 years. Try to find someone who can beat that?  You can’t.

Buffett also put his reputation on the line when he made a 10 year bet that the S&P 500 would beat hedge funds over time. Five years into the bet, guess who is winning? It isn’t the hedge funds.

So, the lesson is that timing the markets is a fool’s game. The successful investor is the one who picks strong companies and sticks with them for the long haul. Isn’t it amazing that some of the most effective investing advice is also the simplest? Slow and steady wins the race. Try to time the markets and you’ll fall on your face.

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Comments

    • Mrs. PoP- Yes, that is very important. A “buy and hold” philosophy only works if you are positive about the long term outlook.

    • Yes, that is one of the keys to his success. When things are down, he steps in and makes money. He loaned GE and Harley vast sums of money during the meltdown.

  3. Another great piece, Mr. 1500! This is one of those things that even when we “know” it, we need to keep being reminded of it. It’s really so simple when ignore the noise and get down to basics.
    Pretired Nick recently posted…Fuck You, HP!My Profile

    • I love it. As is the case for most puzzles in life, the simplest answer is the correct one.

  4. Couldn’t agree more with that assessment Mr. 1500! The key is to focus on finding great companies at fair values, as Buffet has put it many times. With all of my equity purchases this is how I evaluate things and am designating part of my overall investment strategy towards the dividend growth model. If it is good enough strategy for Buffet (see KO as an example holding), then it is good enough for me!
    writing2reality recently posted…Passive Income – April 2013 UpdateMy Profile

    • Yes, Coke is one of his favorites. He even mentioned them a couple times for being an awesome brand: “The grocery stores sells the same thing for half the price, but people still buy Coke.”

  5. ‘“If people try to time the markets, they’ll do very well for their brokers and not for themselves.”’ Ain’t that the truth! I always just have to shake my head at those who’re constantly try and time the market and trade and trade AND trade. Sure, it might be sexier…but what is sexier – thousands of dollars in commissions a year with nothing to show for it or a healthy portfolio that is growing due to prudent investing? I’ll take the second every single time. Slow and steady does indeed win the race, yet it’s so simple that so many miss it. As an aside…19.7% return – DAMN!! 🙂
    John S @ Frugal Rules recently posted…What Would You Give Up For Food?My Profile

    • It is a bit fun to play; that is until you fall off the monkey bars and come crashing to the ground. Some of us have to fall off a bunch of times before we learn…

  7. Loved Buffett’s comment “What happened in 2008 will happen again, but the cause will be different.” Given we’re a society based in consumerism, there will always be companies pushing the envelope to sell more. A word to the wise…be a responsible consumer; in the end, you only have yourself to blame when things go south.
    Ree Klein recently posted…Is It Possible To Be Too Generous?My Profile

  10. Those dudes have been making ridiculous returns for years. Their numbers are unbeatable. Even when people get lucky, they don’t stay lucky for decades straight. The only thing that sucks about their investing style is that it isn’t possible for people like us to see returns like that. We don’t have ins at the companies they invest in and we don’t have teams of people who can forecast data for us. Maybe someday I’ll have a team of analysts!
    Johnny Moneyseed recently posted…You really, really can save money. Here’s how. Part 1.My Profile

    • JM, these are the returns of their company, Berkshire Hathaway. The B shares closed today at $112, so you can buy in.

      I see 2 issues with my beloved Berkshire though:

    • Berkshire is so big, it’s very hard to move the needle now. (Munger’s own words)
    • Buffett and Munger are old. They insist that the culture is in place to ensure future success, but I still thing it is quite a big risk.

      • Regarding the second point though, even if the successor wasn’t so hot, they have such an extensive portfolio now, it would be pretty hard for someone to screw things up.

  11. Yeah, I wish I would have followed Buffett earlier on in life. My kids (6 and 3) have their names permanently set in their minds from my endless talking about them.

  12. They eat horrible too! Buffett is famous for eating lots and lots of red meat. At the meeting, him and Charlie had a huge box of peanut brittle that they continually stuffed into their faces.

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