Warren Buffett is widely acknowledged as one of the world’s most successful investors. Over the past seven decades, most investors and traders can only envy his outstanding performance. He’s CEO of Berkshire Hathaway, a $630bn conglomerate owning more than 60 businesses. ‘Uncle Warren’ has an estimated fortune of over $100bn (mostly in Berkshire shares), making him the world’s sixth-richest person. Yet he’s also a committed philanthropist, having given away more than $45bn to good causes to date.
What’s more, even at 91 years of age, Warren Buffett is happy to share clues to his investing prowess with the world. Indeed, every year, he reveals his wit and wisdom in Berkshire Hathaway’s annual shareholder letters. These are a fantastic read, giving insight into the many decades of expertise Buffett and his vice-chairman Charlie Munger have amassed. What’s more, scores of books have been written about the ‘Oracle of Omaha’: the man, the money manager, the myth. Here are two lessons that I learnt from Buffett that I think made me a better investor today.
Warren Buffett lesson #1: keep some dry powder
In times of great financial stress, several storied firms have turned to Warren Buffett for help. That’s because Berkshire Hathaway has a huge cash mountain — plenty of ‘dry powder’ waiting to be invested. Of course, when Berkshire bails out companies, its help comes at a steep price. At the end of March 2021, the conglomerate had a cash pile of $145.4bn — more than all but a handful of UK companies are worth.
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Therefore, my wife and I always keep cash at hand to invest when Mr Market has one of his periodic meltdowns. For example, in March 2020, as global stock markets collapsed, we had 50% of our family portfolio in cash (having sold stocks in late 2019). As the FTSE 100 and S&P 500 indices crashed by 35%, we reinvested half of our cash, mostly in US stocks. With the S&P 500 more than doubling since its 23 March 2020 low, our dry powder has produced spectacular returns.
Lesson #2: invest in great companies, not gambles
In 35 years of investing, I’ve made just about every mistake you could imagine. One howler I repeatedly made was to invest in weakened companies, hoping they and their share prices would recover. More often than not, these ailing firms went from bad to worse, racking up big losses for me. Over the decades, I learnt this Warren Buffett adage: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Hence, these days, my search for stocks is simple. I aim only to invest in great businesses, even if their shares aren’t actually ‘cheap’ on fundamentals. Instead of scrambling around looking for undervalued stocks, I’m willing to pay extra for safety, security and pedigree. Right now, I see deep value lurking in the FTSE 100, especially among the mega-caps (London’s largest listed companies). Hence, this is where I concentrate my search for businesses with potentially great futures. Today, I’m drawn to top UK companies in pharmaceuticals, consumer goods, tobacco, mining, and banking. And, like Warren Buffett, I’m more than happy to pay fair prices to buy into wonderful companies!
