Lessons — and a stock tip — from Buffett


Berkshire Hathaway, the investment conglomerate run by billionaire Warren Buffett, held its AGM over the weekend in Omaha, Nebraska, in the mid-west of the United States.

An AGM like no other

Company annual general meetings are usually best known for their free coffee and serial pests who take any opportunity to grab a microphone and grandstand. Occasionally, there’ll be some unscripted honesty from a chairman or CEO, but these days most AGMs are tightly controlled affairs.

Not so Berkshire’s AGM. For 5 hours on the first Saturday in May, Buffett and Berkshire Hathaway vice-chairman Charlie Munger take unscripted and unseen questions from journalists, analysts and shareholders. By the way, around 30,000 of the latter usually attend.

(Almost) no holds barred

They answer anything and everything except for the names of companies in which they are buying shares or the specifics of precisely what multiple they use to value the companies they are interested in purchasing.

That’s fair enough on two fronts – if Buffett was clear, then every potential seller would know exactly what price Berkshire was prepared to pay. Perhaps as importantly, in Buffett’s mind, if he gave a specific number it would be misused by investors following his advice. In investing, as in most other pursuits, it’s usually the way the rules are applied – not just blindly followed – that matters.

For example, it’s likely Buffett has a preferred multiple (he let slip this year that he thought 9 or 10 times pre-tax earnings might be a reasonable multiple to pay), but you can bet your last dollar that Buffett doesn’t just look up last year’s numbers, multiply it and make an offer. He’s far more likely to make adjustments based on one-off profits or losses, his expectations of growth and lots of other things.

The only other thing off limits is the question of Buffett’s successor, when the time comes. He and the board know who the current candidate is, but they have decided to keep that to themselves. This year was no different.

Anything else is fair game.

Taking the shine off gold

The two continued their recent attack on gold as an investment. As Buffett reminded us, “When we took over Berkshire, gold was at $20, and Berkshire was at $15. Gold is now at $1,600 and Berkshire is $120,000”. Enough said.

Buy what you know

The two were very complimentary to tech behemoths Google and Apple – but are still declining to invest in either. They continue to resist the pressure others place on them to follow the latest trend – even if it might be sustainable.

Buffett and Munger simply know those companies are outside their circle of competence. That’s a key lesson for individual investors. As Buffett said, “If you buy businesses for less than they are worth, you’re going to make money. If you know which businesses you can and cannot value, you’re going to make money”.

Note, they’re not saying it’s not possible to understand those companies, simply that they don’t understand them. Further, sticking to what you know is more likely to make you money than giving in to a trend you don’t understand.

Wait for the right price

If you’re looking for an answer on how Buffett became so wealthy, the last quote and the next one sum it up very simply – and very powerfully. On top of understanding which businesses you truly know, Buffett gave a one-line addition – “The beauty of stocks is they do sell at silly prices sometimes. That’s how Charlie and I got rich.”

The last piece of Buffett I want to share with you is an answer to a question on his health. Buffett recently announced he had been diagnosed with prostate cancer. When he was delicately asked how he felt, he answered “I feel great. I love what I do. I work with people I love”.

Keep it simple

Now, you’ll find no shortage of people trying to tell you how complex successful investing can be (and then usually trying to sell you something), but Buffett’s message – and track record – show that you can make investing very complex if you want to, but you don’t need to.

Of course, simple isn’t the same as easy – enlarging your circle of competence can be time consuming if you’re looking at new businesses or emerging technologies. By the same token, Buffett’s largest holdings are neither of those two things – his top four stock holdings are Coca-Cola, American Express, IBM and US bank Wells Fargo – hardly obscure businesses or with cutting edge products.

Foolish take-away

Perhaps the best investing idea from the meeting was Berkshire Hathaway itself – while not saying it directly, Buffett left those in attendance in no doubt that the company’s shares are cheap.

If you haven’t already, now is the time to set up an international trading account, and Berkshire shares should be at the top of your list.

If you’re looking in the market for some high yielding ASX shares, look no further than “Secure Your Future with 3 Rock-Solid Dividend Stocks”. In this free report, we’ve put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

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The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. Scott Phillips owns shares in Berkshire Hathaway and Coca-Cola. This article contains general investment advice only (under AFSL 400691).


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