Warren Buffet’s Woodstock for capitalists
Woodstock for capitalists is what Warren Buffett calls the annual chat he and partner Charlie Munger have with Berkshire Hathaway shareholders. It’s astounding to think 35 000 people went to Omaha in the US recently to listen to 82-year-old Buffett and 89-year-old Munger. More so when you consider these two guys have been partners for 54 years in the fifth biggest company in the world: Berkshire Hathaway, which is purely an investment company. The pair answered questions for six hours, ranging from the state of the world economy, to investment strategies, to advice for business success.
It’s impossible to sum up a six-hour Woodstock for capitalists session in a few pages. Instead I’ll try to highlight a few of their main points to show the logic of these two investment icons. To present this summary in a sensible way, I’ve divided the discussion into themes and looked at selected key points under each. Note that this is in no way a complete summary, and I have put it together by combining several sources.
What went down at Woodstock for capitalists
State of the US economy
The US economy has been in a worse position than it is today, for example, following WWII, after which it recovered well and grew for decades. “We’ve encountered far worse problems than we face now,” says the pair. “This is not our toughest hour.”
If the US economy manages to increase its rate of growth, most of the current problems will solve themselves. Buffett says the problem will then fade into “insignificance”.
Greece and the EU
Buffett is critical of the decision to include Greece in the European Union. “It’s like putting rat poison into whipped cream,” he says. “Greece is not a responsible country.” But he says while it will take a bit longer, Europe will eventually solve its economic problems.
Decisions on the basis of macro-economic considerations
In the 50-plus years they’ve worked together, Buffett and Munger say they have never taken a decision on the basis of what is going on in the economy, or what the economic forecasts are. If you say you know what’s going to happen, then you haven’t don’t your homework, you’re simply uninformed and haven’t done enough research. At Woodstock for capitalists they explained: “If you’re not confused, you don’t understand things very well.”
If you’re not in control of your emotions, you shouldn’t be managing your own investments. Investment decisions must be made on rational grounds, not from a behavioural or emotional departure point.
“We’ve always tried to stay sane when other people – a lot of them – go crazy. That’s a competitive advantage. When people get scared it’s very hard to deal with them. People get fearful en masse. When we see falling prices we see opportunity.” They also emphasise: “You can’t afford to go with the crowd on investing.”
When it comes to forecasts, their opinion is clear: “You can’t make a lot of money trying to think what is going to happen tomorrow.”
If you’re not a professional investor…
Ensure you are in a diversified portfolio. The best thing to do is to use low cost index funds. The investment industry is good at shifting capital from the investor to the fund manager. The best way to overcome that is in an index fund. The basis for this is that costs are lower and few fund managers actually manage to beat the index.
Interest-bearing investments versus shares
Buffet refers specifically to the US. but many of the principles can be applied to South Africa. He feels sorry for people who invest in interest-bearing investments. “For 90% of my life it has been better owning equities,” he explains. This means exposure to growth assets is critical for long-term growth.
Advice for successful business management
Here Buffet focuses on three points:
- Manage cost and keep it low
- Build your brand
- Make sure your clients are happy
When asked a critical question about their investment in the motorcycle group Harley-Davidson, Buffet comes back to focus on branding: “Any company that gets customers to tattoo ads on their chests can’t be all that bad.”
The long-term nature of investing
Charlie Munger supports Warren Buffett when they explain long-term investment isn’t three or five years. It’s longer than that. Noteworthy is that a person aged 89 isn’t worried about what’s going to happen in the next three to five years.
On children, wills and inheritances
The pair recommend you share your will with your children when they are in their 30s. Buffett emphasises the behaviour of parents determines their children’s future It’s about them knowing about their inheritance, not the amount of the inheritance. The way parents work with money determines how their children will work with money.
Making an investment
Whether you only buy 100 shares in a business or the whole business, you must regard any investment as if you are buying the whole company. Buffet adds you must be prepared to pay a premium price for a quality business. “Paying up for an extraordinary company is not a mistake,” he emphasises. Buffet and Munger also believe in allowing businesses to manage themselves. “We’re decentralised almost to the point of abdication,” they said at Woodstock for capitalists.
- To young people the pair says: “Start developing your track record as early as you can, one that is a product of sound thinking.”
- On career choice: “You have got to work where you’re tuned in. I have never been successful at something I did not like.”
- Munger says: “The game of life is the game of everlasting learning.”
- When it comes to expertise, they advise: “Knowing the edge of your competency is very important. If you think you know more than you do, that’s looking for trouble.”
Practicalities: What does all this mean for investors?
I believe Warren Buffet’s Woodstock for capitalists is a tune serious investors can listen to:
- Ensure you are not emotional when it comes to investment decisions. It’s better to consult a good financial advisor, who isn’t emotionally attached to your specific circumstances. One who will give you rational advice.
- Use cheap index fund solutions if you are not a professional investment manager.
- Don’t pay too much attention to macro-economic factors. Don’t rely on your ability to predict the future. The first step towards financial fitness is an executable, realistic plan that you can stick to. A plan like that helps you focus in uncertain times. It reminds you why you made certain decisions in the first place, if you doubt yourself. That’s why it’s preferable to enlist the help of an expert personal financial planner. It helps you focus on what you understand and make a success of it.
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