X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Lessons from Warren Buffett - LII - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Aug 27, 2008

    Lessons from Warren Buffett - LII

    In the last article, we rounded off our discussion on the master's 2002 letter to shareholders. Now, let us move forward to letter for the year 2004 (we have omitted the letter for the year 2003 as most of what Warren Buffett has said in that letter has been covered before) and try and discuss the investment wisdom there in.

    Its not all skill and craft
    Although it has been proved beyond doubt that Buffett is a stock picker of the highest order, even he would have been able to accomplish little had he not been blessed with a favorable corporate environment. Since the underlying earnings are the sole determinant of where a stock could be headed for the long-term, it is very important that a firm keeps on growing its earnings. And this is where the master benefited from being at the right place at the right time. As per Buffett's own admission, for 35 strong years leading upto the year 2004, American businesses had delivered terrific results.

    Hence, it could have been relatively easier for investors to earn good returns provided they did not make few of the mistakes that are very common and which usually lead to sub-par and even disastrous results despite a favorable environment for stocks. The master has been kind enough to spell out some of the reasons why investors have had experiences ranging from mediocre to disastrous from investing in stocks even when corporates grew their earnings handsomely.

    The golden words
    Buffett says, "There have been three primary causes: first, high costs, usually because investors traded excessively or spent far too much on investment management; second, portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to the market marked by untimely entries (after an advance has been long underway) and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

    Small is indeed big
    If one wants a real life proof of what could be achieved by eschewing the above mentioned pitfalls, one need not go any further than have a look at the master's own track record. During the period 1964 - 2004, while the broader market performed well and grew at a CAGR of 10.4%, the master, by sticking to the above-mentioned principles have produced returns that on an average have beaten the broader market by 11.5% year after year. Out performance of this magnitude for such a long period of time translated into a sum that at the end of the period under consideration is a whopping 54 times more than the one produced by staying invested in the broader market! In fact, to make matters worse, quite a few investors have not been able to match even the market returns because they have tried to seek the very routes to profit making that the master has so vehemently opposed in the above paragraph.

    This more than anything goes to show how frictional costs like portfolio management fees, brokerage, taxes and the like, which seem trivial currently can hurt your investment performance in the long run. A valuable lesson indeed, for anyone who is looking to be a net investor in equities for the next many years.

    Lessons from Warren Buffett Series - Previous article | Next article | All Articles
    Try the Warren Buffett Quiz

     

     

    Equitymaster requests your view! Post a comment on "Lessons from Warren Buffett - LII". Click here!

    1 Responses to "Lessons from Warren Buffett - LII"

    V.Vijayamohan

    Nov 10, 2013

    The 3 factors are all significant. 1. Frictional Costs due to frequent shuffling. 2. Decisions based on Tips rather than analysis 3.Start and stop Approach -with untimely entries and hasty exits are really the ones every Investor must keep in view - to make the best profits from his Investing.

    Like 
      
    Equitymaster requests your view! Post a comment on "Lessons from Warren Buffett - LII". Click here!
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 18, 2017 (Close)

    MARKET STATS