Buffett: Your biggest risk is not buying shares

Warren Buffett reminds investors the risks of being out of the market are huge

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

For Warren Buffett watchers – myself included – today is one of the most interesting days of the year.

Along with the Berkshire Hathaway (NYSE: BRK-A, BRK-B) annual general meeting in early May each year, many investors keenly anticipate the release of his fabled letter to the company’s shareholders. The letter is in equal parts company update and investment master class, with some Buffett humour thrown in. His letters are always required reading, and this year’s letter didn’t disappoint.

44 billion reasons to pay attention

Warren Buffett is without peer as an investor – in a game where keeping score is easy, Buffett is the third richest man on the planet, and the single richest man to have earned his fortune through investing. According to Forbes magazine, in September of last year, Buffett was worth a cool US$44 billion – and Berkshire shares are up another 15% since then.

He has also become something of the standard bearer for capitalism and investment – happily doling out investment advice through his annual letters, media appearances and his marathon Q&A sessions at the company’s annual meeting.

Missing the mark – for now

On the first page, as always, is Berkshire Hathaway’s performance, comparing the growth of the company’s book value with the growth in the US S&P 500 share index. Buffett’s business lost out to the market last year – he called the year “subpar” – recording growth of “only” 14.4%, compared to a gain of 16.0% for the index.

As Buffett himself says, “we do better when the wind is in our face” – partly because Berkshire measures growth in the value of its businesses, whereas investor sentiment – particularly when the market gets excited – can leap ahead significantly.

On the hunt

The “Oracle of Omaha” also returned to his ‘elephant gun’ analogy, making clear that even after investing a cool US$12 billion to purchase a half-share of US ketchup-to-baked beans maker Heinz (NYSE: HNZ), Berkshire still has plenty of cash.

He is looking for another large ‘elephant’ of an acquisition, with Buffett joking that he and business partner Charlie Munger had “donned our safari suits and resumed our search for elephants”.

As Berkshire-watchers would know, the company has selected two investment managers to take on steadily increasing proportions of Berkshire Hathaway’s investment portfolio. The men, Todd Combs and Ted Weschler, now have almost US$5 billion each at their disposal. Impressively, Buffett says each man managed to beat the S&P 500 by “double-digit” margins in 2012 – not bad when the market growth was in the mid-teens.

No dividends… yet

Famously, Warren Buffett has eschewed paying dividends to the shareholders of Berkshire Hathaway, believing (correctly – by a huge margin – thus far) that he can compound returns for shareholders at a better rate by keeping the money inside the business. He has suggested in the past that shareholders needing the cashflow should instead sell a small proportion of their shareholdings.

He went one step further this year, demonstrating the difference between the two approaches – and seemingly putting to rest any thoughts of Berkshire paying a dividend any time soon. In doing so, however, he also laid out the rationale which will give his successors a Buffett-sanctioned yardstick for making the decision on the conditions under which a dividend might be justified – the company’s ability to grow its net worth, and the relative price of its shares.

Embrace uncertainty

Buffett also addressed his fellow CEOs in his letter – a note that could equally apply to investors. In short: embrace uncertainty. While his example uses the US markets, the message is universal, and equally applies to Australian CEOs and investors. Buffett writes:

“…Of course, the immediate future is uncertain… It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful).

“…business will do fine over time. And stocks will do well just as certainly… investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don’t forget that shareholders received substantial dividends throughout the century as well.)

“Since the basic game is so favorable, Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts,” or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.”

Foolish takeaway

It’s a mantra we couldn’t agree with more at The Motley Fool – and one that has stood Warren Buffett in good stead over the past 48 years at Berkshire Hathaway – despite many, many claims that he has lost his touch or that “it’s different this time”.

He hasn’t, it isn’t – and investors ignore The Sage of Omaha at their peril.

Attention: While Berkshire Hathaway might eschew dividends, Foolish, dividend loving investors who are looking for ASX investing ideas can click here to request a Motley Fool free report entitled Secure Your Future with 3 Rock-Solid Dividend Stocks.

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, 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.  This article contains general investment advice only (under AFSL 400691).  Motley Fool analyst Scott Phillips own shares in Berkshire Hathaway.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »