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Lessons from Warren Buffett - LII - Views on News from Equitymaster
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  • 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.

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    1 Responses to "Lessons from Warren Buffett - LII"


    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.

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