After more than 30 years of unrivaled investment success, Warren Buffett may be losing his magic touch.
But there's more to Berkshire's weak showing than just the operating and investment performance. To be blunt, Buffett is viewed by an increasing number of investors as too conservative, even passe. Buffett, Berkshire's chairman and chief executive, may be the world's greatest investor, but he hasn't anticipated or capitalized on the boom in technology stocks in the past few years."– Andrew Bary, Barron's
It was December, 1999. The Nasdaq had just posted another stellar result, up a whopping 85% in the past year, as investors clamoured to get in on the next hot tech pick. Meanwhile the share price of Buffett's company Berkshire Hathaway had fallen 30% from its high, dramatically under-performing the market.
Had the Oracle of Omaha lost his touch? Buffett claimed he was exercising patience in a world gone mad, with share prices running well ahead of intrinsic value. But to most observers, Buffett's underperformance was a clear indication that he was over the hill. Unable to adapt to the "new world" that was being brought about by rapid advances in technology.
Buffett's inactivity may have looked like ineptitude, but it would not be long before he emerged once again as a genius. In early 2000 the NASDAQ index – the primary index for high-tech companies – began to crash, plummeting 75% over the next two years.
Patience pays
"The stock market is a device for transferring wealth from the impatient to the patient." – Warren Buffett
Buffett's patience and discipline may have led to ridicule, but it is one of the core competitive advantages that makes him the world's greatest investor.
Watching Buffett (84 years old) and Munger (91) on stage at the Berkshire Hathaway annual meeting celebrating the company's 50th anniversary and talking about planning for "the next 50 years", I was struck by the incredibly long time horizon that both men still think in.
During the meeting Buffett even talked about using a one hundred year time frame when considering an acquisition. One hundred years! Contrast that with the hyper-short-term focus of most investors on Wall St, where analysts pile on top of each other in their attempts to guess the next quarterly results.
For well over 50 years Buffett has thoroughly smashed the market by sticking to what he knows and understands – by investing within his circle of competence. In 1999 that made him appear out of touch, but the truth was Buffet was one of the few investors that was in touch with what truly mattered – underlying intrinsic value.
Key Takeaways for Pro
Joe and I face constant temptation.
Every day the market is offering to sell us part ownership stakes in thousands of Australian companies, and we must determine when we are being offered a bargain.
We are constantly scouring the market for strong businesses with great long term prospects that are misunderstood and undervalued. We may spend days or even weeks digging in to a particular company – reading annual reports, talking to customers and competitors, meeting with management – only to face the cold hard truth that we are not yet being offered a cheap enough price.
When we've just finished a tonne of research and the company falls short due to a high valuation it would be very tempting for us to lower our standards. To go along with the rest of the herd and increase the price that we are willing to pay.
But to do so would be to invite disaster. It may not happen right away, it might even take years, but eventually our precious Pro portfolio would pay dearly for those slackened standards. Just as the over-excited tech speculators of 1999 ultimately faced judgement day.
Instead we will keep our focus on the task at hand, add the newly researched company, and its valuation to our regularly updated watch list, and move on to the next potential Pro target.
It's not always easy, but remaining patient and focusing on the long term is the only way to build lasting wealth. Just ask Warren.
