Six Investing Principles From Warren Buffett’s 2013 Shareholder Letter

You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.

If you instead focus on the prospective price change of a contemplated purchase, you are speculating.There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.

With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.

Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock marketmight do in the years immediately following – 1987 and 1994 – was of no importance to me in making those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.

Although I skimmed through Buffett’s letter when it first came out on March 1st, I’m just now getting a chance to really think about what he had to say as I go through it a second time. After telling the story of a Nebraskan farm and rental property near NYU, Buffett again slams the notion of measuring success in terms of changes in market price.

As of late, it’s become fashionable to slam Coca-Cola as an investment. I’ve even read articles of people selling their Coca-Cola stock because soda volumes in the United States have declined. That kind of thinking gives undue influence to the wrong statistic. The general trend is this: when American soda volumes go down a percentage point or two, profits still grow 7% or 8%. And when soda volumes grow three or four percentage points in a year, then Coca-Cola’s overall profits tend to go up by 11-13%.

Any way you look at it, Coca-Cola has been doing exactly what a blue-chip holding should do: grow profits and grow cash payouts to its owners. Since 2007, Coca-Cola has increased profits from $1.29 to $2.10 per share, for a gain of over 60%. Over the same time, the dividend has increased 79% from $0.68 per share to $1.22 per share.

Even if you have an incredibly short-term mindset, the company’s performance has still been satisfactory. In the past twelve months, profits have grown from  1.97 to $2.10, a bit below 7%. And the dividend has grown from $1.12 to $1.22, for a gain of almost 9%.

In 2017 and 2018, I have no idea of Coca-Cola will trade at $35 per share, $45 per share, or $55 per share. But if it’s part of a nice collection of assets, it shouldn’t matter—the annual dividend will be somewhere around $1.60 per share. If things go well, maybe $1.75 per share. If the poet Juvenal wrote investing articles, he’d liken people that worry about the $35 or $45 share price or the American soda volumes as the “bread and circus” people that get too easily distracted. Stock price is not truth (it only reflects what other people are willing to pay for a business share at a given moment, in an Ebay style auction), and American soda volumes only provide a partial picture of a company that has over 500 brands making $10 billion in annual profits across 200+ countries.

One of the automatic trigger signals that indicates that someone does not truly “get it” when it comes to long-term investing is when they speak in terms of share price. My “nails on the chalkboard” reaction comes when financial analysts say stuff like “Microsoft was at $35 per share share in 2002, and now it’s only at $37 per share. Talk about dead money.” A comment like that either assumes: (1) you don’t think in terms of 10+ year horizons, or (2) you’re an idiot.

It ignores that: (1) Microsoft initiated an $0.08 dividend in 2003 that has grown to $0.89 per share annual payouts in 2013, and (2) Microsoft the business increased per share profits from $0.94 per share in 2002 to $2.65 by the end of 2013. Profits increased 181% over those eleven years; the business did fine, the problem is that people were paying 30-40x profits for the stock at the turn of the millennium.

Long-term investing is about divorcing yourself from maniac thinking; the worst place you could be as an investor is feeling the need to “make something happen.” You don’t want to find yourself saying things like “I need to turn this $250,000 pile of cash into $500,000 by 2017.” Buffett describes long-term investing as an almost genteel art. You find something that will get you $3 or $4 in sturdy income for every $100 that you set aside to invest, and then you give it a chance to grow with time.

If you’re aiming for the moon, then you narrow your investment universe to the fifty or so companies that you believe will still be churning out higher profits ten, fifteen, twenty years from now. That’s your rocketship. Once you buy a seat, you just kick back and let the CEOs of Exxon Mobil, Nestle, Coca-Cola, and Johnson & Johnson be your pilot. The catch is that it will take you a decade or two, rather than a few months, to get there. But what you give up in speed is offset by the near certainty of the fact that you will, one day, arrive there.




Originally posted 2014-03-08 21:28:15.

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5 thoughts on “Six Investing Principles From Warren Buffett’s 2013 Shareholder Letter

  1. innerscorecard says:

    I think that the problem is that a lot of people have bought into the cult that the only reason to invest is for growth. They don’t realize that price is paramount, so that a company with even negative growth could be far better than a company with rapid growth, assuming enough of a differential in price.

    That’s the attitude you see in investors in some of these social media and other hot technology stocks. They don’t think about valuation one bit, but simply think that the companies are growing. It’s innumeracy at its most basic level.

  2. scchan_2009 says:

    Talking about maniac buying: it “fascinates” me that people are buying Amazon with 100-some PEs, and don’t forget those new biotechs and dot coms (Twitter) that have never made money. I do invest in growth stocks, but we are talking about 20-some PEs, not 100s of PEs or negative EPSs.

    I recently added my holding to IBM, Coke and Unilever. At least I know, someone will be selling soda pop and ice cream 30 years from now. IBM is a great survivor of all the tech changes last century with highly stable cash flow and dividend history.
    As for projecting future earnings, it is difficult. As Warren himself said “back mirror is clear, and the front is cloudy.” The moment one is jumping into 100-some PEs and negative EPSes, one is making very large assumptions in future earnings. There was an article on FT which gave an estimate of how much growth Amazon needed to justify its PE. Even in somewhat aggressive estimates, one is still better off buying government bonds than Amazon shares.

  3. scchan_2009 says:

    Also about “macro projections” – Warren isn’t the only person warned against macro projections. Lynch once said “spending 13 minutes on market outlooks means you wasted 10 minutes of your time.” Lynch and Buffett are both bottom-up investors, but there are some people (like George Soros – the man who broke the Bank of England and various south east Asia central banks) did manage to make money on macro (but I think Soros are more an exception, and he did have a huge appetite of risk).

  4. innerscorecard says:

    scchan_2009  Yeah, and oddly enough the more ridiculous valuations get, the easier the more ‘genius’ they seem to some people. It’s like the apocryphal Stalin quote – one billion on Instagram is a tragedy…19 billion for What’s App is a genius statistic.

  5. scchan_2009 says:

    innerscorecard scchan_2009 The funny part of the WhatsApp deal is that Facebook paid mostly in shares. So the deal worth a lot less if Facebook share price is much lower (well if I am the folks in Whatsapp, first thing I will do is to sell the Facebook shares, but that will trigger a flag for people who keep tracks of insider trading).
    I guess Mark Z can do what he wants, while FB’s shareholders and analysts BSing the growth of FB. I am happy with my Coke and IBM shares 🙂

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