Patience and a focus on the long run
By James Parkyn - PWL Capital - Montreal
How to invest the Warren Buffett way—lessons from the latest Berkshire letter
Warren Buffett’s letters to shareholders are always packed with brilliant investing wisdom and fascinating insights. And this year’s is no different.
Buffett is the world’s most famous stock investor for a good reason. He grew a struggling New England textile manufacturer into a massive conglomerate that today is the seventh-largest U.S. company by market value—over $870 billion as of mid-June. Along the way, Buffett has used the annual Berkshire Hathaway shareholder letter to document the nuts and bolts of his success since 1965.
At PWL, we like to follow Buffett because we share his focus on a long-term investor’s mindset—meaning buying and holding as long as it is sensible to do so. I also talk about Buffett’s most recent shareholder letter in my latest Capital Topics podcast with François Doyon La Rochelle
Charlie Munger was Berkshire’s “architect”
Buffett started this year’s letter with a loving tribute to his longtime friend and business partner Charlie Munger, who died in November just 33 days shy of his 100th birthday.
Buffett, 93, describes Munger as his “part older brother, part loving father” who repeatedly “jerked me back to sanity when my old habits surfaced.” Munger was the “architect” of Berkshire, while Buffett “acted as the ‘general contractor’ to carry out the day-by-day construction of his vision. Charlie never sought to take credit for his role as creator but instead let me take the bows and receive the accolades,” he writes.
“Though I have long been in charge of the construction crew; Charlie should forever be credited with being the architect.”
Apple gains illustrate strategy
The Berkshire philosophy based on Munger’s vision is simple. Success comes from patiently riding out market volatility and holding positions for the long term, not trying to time the market.
Berkshire’s investment in Apple is a great example illustrating the approach. Berkshire came to Apple fairly late, buying its initial position only in 2016 and purchasing $36 billion (figures in USD) of Apple stock over the next three years. The investment paid off astonishingly well. As of May, Berkshire’s stake had soared in value to $157 billion, the Wall Street Journal reported .
“Berkshire is sitting on about $120 billion in paper gains, likely the most money ever made by an investor or a firm from a single stock. Nothing in Buffett’s long career comes close,” the newspaper said.
Berkshire has made an annualized return of over 26% from Apple including dividends—compared to a 12.9% gain for the S&P 500 during the same period.al-gains taxes will be a disincentive. Given Canada’s deepening productivity woes, it is precisely the wrong policy.”
Stock-picking “harder than you would think”
Buffett’s Apple investment shows the value of holding for the long run and ignoring the short-term volatility that the stock has seen over the years.
At the same time, lest anyone come away thinking the Apple story is a great argument for stock-picking, Buffett warns strongly against such a conclusion.
“Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes,” he writes. “It’s harder than you would think to predict which will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen.”
Upside limited
Buffett’s letter includes a good example of the risks of stock-picking. He describes “severe earnings disappointment” at Berkshire Hathaway Energy—the company’s 100%-owned utilities and energy investment, which encountered significant regulatory and other issues last year.
Buffett acknowledges that he and his partners “did not anticipate or even consider” these issues and “made a costly mistake in not doing so.”
And despite Berkshire’s own meteoric growth, he warns that the gains aren’t likely to repeat in future: “We have no possibility of eye-popping performance.” The company is in a way a victim of its own success; as Buffett has warned in the past, “A high growth rate eventually forges its own anchor.”
“Patience pays”
Buffett himself is famous for suggesting that investors invest passively and broadly for the long term and avoid investment funds with high fees. As he puts it in his shareholder letter, “Patience pays.”
At PWL, we couldn’t agree more. Our own approach is to invest passively in a broadly diversified portfolio using evidence-based strategies. And this has meant that through our ownership of broad index funds, we’ve owned Apple stock even longer than Warren Buffett!
An investor’s mindset, a long-term focus, patience—the essence of what Buffett calls his “common sense” approach rooted in his birthplace of Omaha, Nebraska—are ideas we can all benefit from.
Find more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website.
Read more about Charlie Munger in the book Poor Charlie’s Almanac: The Wit and Wisdom of Charles T. Munger, now in its fourth edition.