I have a confession: I simply can't keep up with everything going on during reporting season. If you're like me, you might benefit from revising the basic tenets of investing, before attempting to assimilate the mountain of new information. Today is the last day of reporting, this article is a meditation on the basic principles of investing, and Mr Buffett will be our guide.
In a recent article Warren Buffett suggests that he is willing to make an investment that, on modest assumptions, will return an "unleveraged current yield [of] about 10%." He describes his assessment of his farm in Nebraska thus: "I calculated the normalised return from the farm to then be about 10%."
In such circumstances a corollary requirement, is the likelihood of further upside. Regarding his farm he recalls, "I also thought it was likely that productivity would improve over time and that crop prices would move higher as well." Similarly, a commercial property investment he made yielded 10% at the time of purchase, and it was a strong prospect that yield could increase when a certain lease came up for renegotiation.
Another timely reminder (for me, at least) was his recommendation that investors focus on individual companies, rather than the market as a whole. "Forming macro opinions or listening to the macro or market predictions of others is a waste of time," he wrote. "Indeed, it is dangerous because it may blur your vision of the facts that are truly important."
Harking back to his investments in the farm and commercial property he reflects on the irrelevance of Mr Market, against his eventual returns. "What the economy, interest rates, or the stock market might do in the years immediately following" he wrote, "was of no importance to me in determining the success of those investments." The lesson here is to focus on the fundamentals, and not be swayed by the "capricious and irrational behavior" of the market. This is worth remembering, because as investor sentiment improves, it becomes harder to find suitable investments based on the fundamentals. This increased difficulty leads to investors (such as myself) becoming more willing to compromise with Mr Market, in other words, to be affected by his moods.
For the sake of irony, here's what you won't often read. Buffett also questions the belief that it is "important to listen to pundits — and, worse yet, important to consider acting upon their comments."
Foolish takeaway
Even Warren Buffett listens to someone. Indeed, Buffett started his missive by acknowledging Benjamin Graham (clearly, he was no pundit). "I owe so much of what I know about investing to him," Buffett wrote. Personally, I owe others for almost everything I know about investing. Perhaps a Charlie Munger quote is appropriate: "The other big secret is that we're good at lifelong learning. Warren is better in his 70s and 80s, in many ways, than he was when he was younger. If you keep learning all the time, you have a wonderful advantage."
The lesson from Buffett (and Munger) is that we all need to spend the time to do our own original research and learning about investing. Clearly, we need to do a lot of reading – that's what my Dad has always told me, anyway. Perhaps it's time I took a speed-reading course, because I'm yet to make a noticeable dent in those half-yearly reports.
