Benel Lagua l September 15, 2023 l The Manila Times
TIME Magazine lists Warren Buffett as among the most influential people in the world. He has set world records for achieving both high personal net worth and high corporate value for his holding company, Berkshire Hathaway Inc. Buffet is arguably the world’s most successful investor. For this reason, many books have been written about him in the hope of distilling lessons worth emulating.
One of the best collections of Buffett’s philosophy is “The Essays of Warren Buffett” by Lawrence Cunningham, a compendium of Buffet’s original annual letters to Berkshire shareholders. Here’s an interesting investing philosophical missive appropriate to today’s difficult investment environment.
“A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices of beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?”
“But now for the final exam: If you expect to be a net saver during the next five year, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock price rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
I often ask this question in my finance classes. Many industries follow a life cycle from start up stage, to consolidation, to maturity and then to relative decline. Where can we find the best stock buys and lending prospects? Most students will identify one of the stages, but in reality all stages may have good prospects.
A declining market, such as what we have today, benefits the net savers per Buffet. An improving market benefits the regular investor looking to invest for a definite period of time. Investment opportunities will be present in all stages of the economic cycle, may it be boom or bust. Buffet advocates adopting Ben Graham’s key to successful investing, which is to purchase shares of good businesses when market prices are at a discount from underlying business values.
Following are some fundamentals advocated by Buffet as captured in “The Essays”. These are sample quotes that outline his approach to investing.
“One, you don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and keep things simple. When promised quick profits, respond with a quick “no”. Two, focus on the future productivity of the asset you are considering. If you don’t feel comfortable estimating future earning, just forget it and move one.”
“Three, if your focus is on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. However, I (Buffet) am skeptical of those who claim sustained success in doing so. Four, games are won by those players who focus on the playing field – not by those
whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays. Fifth, forming macro opinions or listening to the macro or market predictions of others may blur your vision of the facts that are truly important.”
“Finally, your goal as an investor should simply be to purchase at a rational price a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”
Warren Buffet’s letters to the shareholders of Berkshire Hathaway are filled with helpful insights in the real world of finance. Buffet talks about a wide range of issues – selecting managers and investments, valuing businesses, governance, corporate culture, opportunities, acquisition and so on. Any serious student of finance should learn from the master.
For this column, I have chosen to quote from him directly than to interpret his words. The reader will find more words of wisdom reading Buffet’s own letters to shareholders. A column like this can only provide a sampling that should pique the interest of the learner. There are more from where this came from. If I may use a familiar approach for the Christian faith, we understand the gospels deeper through the epistles of St. Paul. For this reason, the weekly Mass readings integrate parts of St. Paul’s letters.
*** (Benel Dela Paz Lagua was previously EVP and Chief Development Officer at the Development Bank of the Philippines. He is an active FINEX member and an advocate of risk-based lending for SMEs. Today, he is independent director in progressive banks and in some NGOs. The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.)