Every year Warren Buffett sends out a letter to shareholders giving them a summary of the previous year, his thoughts on the future and some self-deprecating comments. Even though many people have the impression that everything Warren buffet touches turns to gold, this is not the case and the man himself is well aware of that. So, what interesting quotes can we take from Warren Buffett’s latest words of advice?
“I’ve made some dumb purchases.”
The truth is that we all make “dumb” purchases at some point whether we base these on value investments, new trends or perhaps we misread the markets. Even though the US market, to take this as an example, is currently flirting with new highs the divergences in sector performance is extreme. Even though many people bought into the Donald Trump economic future there are just as many who sold up and initially switched into gold, much to their annoyance. So, the message here is that we all make dumb purchases but if we make more good purchases than dumb ones, positive performance will come through.
“It’s the growth of the Berkshire forest that counts. It would be foolish to focus over-intently on any single tree.”
In simple terms this message is all about diversification and the fact that in a perfect world all of your shares would move higher at the same time even though this is not possible and not healthy. So, whether you throw in a mix of high-growth and defensive stocks with perhaps some commodities they will never move in the same direction. If your portfolio is at least keeping pace with the market this bodes well for the future. Let us reiterate that message: You need to diversify your portfolio to give it some backbone and stability!
“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.”
If you look back at any stock market around the world you will see an array of uptrends and down trends. Every decade, in the words of Warren Buffett, there will be an economic disaster which causes a significant sell-off in assets and the opportunity to pick up some new investments for the long term. The message here seems to be, when you see good long-term value after a sell-off you should be brave and take advantage rushing out with “wash tubs, not teaspoons”. This is the epitome of value investing which has proven very successful for many people.
“Widespread fear is your friend as an investor, because it serves up bargain purchases…. Personal fear is your enemy.”
We all know that markets are over exuberant on the upside and the downside and volatility is created by fear. There is nothing wrong in taking a short-term profit but if you are looking more long-term then these periods of “fear” can bring about some very interesting investment opportunities. On the flipside of the coin, personal fear can lead you to making wrong decisions and indeed missing out on good long-term opportunities. This makes perfect sense in theory but very often it is not as easy to put into practice.
“Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.”
Even if economies are growing strongly, stock markets are flying high and investors are banking good profits, there will always be the gloomy forecasts from the “we told you so” brigade. Warren Buffett is taking a snipe at this particular group of people who seem very happy to promote their gloomy forecasts but how many of them actually act on their own advice? The US stock market is a prime example, as it continues to flirt with all-time highs it will eventually pull back and these “gloomy forecasters” will then pat themselves on the back and say “we told you so”. They often forget that their gloomy forecasts began when the market was much lower!