Warren Buffett released his annual Berkshire Hathaway letter to shareholders recently. There were many words of wisdom for investors to ruminate upon, particularly under a section titled The Secret Sauce.
In this, he outlined some winning investments he made decades ago, including Coca-Cola. The cash dividend Berkshire received from its shares of Coke in 1994 was $75m. By 2022, the dividend had increased to $704m.
Importantly, individual investments such as this have more than made up for the number of losing stocks he’s picked over the last 30 years. Buffett says the lesson for investors is this: “The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders.”
Buy and hold
The secret sauce then is to buy and hold. Or as Buffett puts it: “We seek out good long-term
investments and stubbornly hold them for a long time.”
Of course, this is the opposite of day trading, which is very much short term. According to data from investment platform eToro, around 80% of day traders lose money over the course of a year. More than 75% quit within two years.
By contrast, the Oracle of Omaha’s buy-and-hold investing strategy has made him one of the world’s wealthiest people. And it has done so with surprisingly few big winning stocks.
Again, day trading is the opposite of this. I need to find lots of winning trades, day in and day out. Or at least my specialist trading software does. That means zero blooming flowers over time and no rising dividends to turbocharge compounding wealth.
Avoid froth
In this year’s shareholder letter, Buffett also cautions investors to avoid “froth” in stock markets. He’s referring to the speculative hype that periodically sends stock valuations too high, frothing them up.
Buffett’s mentor, Benjamin Graham, famously said: “Day to day, the stock market is a voting machine. In the long term, it’s a weighing machine.” I think this perfectly encapsulates how the stock market works, both in the short term and the long term.
In the short run, it can be a popularity contest. That’s where day traders operate — acting on short-term trends and gyrations. However, over time, the market will weigh a company based on its fundamentals. On how heavy it becomes, essentially.
Amazon weighed
Shares of Amazon fell 80% in 2000. Responding to this in his annual letter to shareholders, Jeff Bezos used Graham’s famous quote. He noted there’d been a lot of voting during the late-90s dotcom bubble, and not much weighing.
But the Amazon founder said: “We’re a company that wants to be weighed, and over time, we will be — over the long term, all companies are. In the meantime, we have our heads down working to build a heavier and heavier company.”
Bezos was right. Over time, the market would go on to weigh Amazon heavily. Today, even after a 50% share price decline, the company is valued at nearly a trillion dollars.
The key then is to find companies that are getting heavier over time. That is, enterprises that are growing their earnings and dividends consistently over a long period. Then wait patiently for the right moments to pick up shares — and hold them stubbornly!
