Warren Buffett’s Dropped Some Pearls Of Wisdom

Warren Buffett’s Dropped Some Pearls Of Wisdom
Paul Allison, CFA

about 1 year ago2 mins

Mentioned in story

Warren Buffett’s annual letters to Berkshire Hathaway shareholders are packed with investment wisdom. I’ve read the latest installment and picked out my three favorite pearls.

1. Don’t diss the buyback

Buffett’s not mincing his words here, calling critics of buybacks “economic illiterates or silver-tongued demagogues”. Buffett argues that share buybacks are a transaction between a company and its investors at a mutually beneficial price, where no one gets hurt. Of course, he’s referring to buybacks that are “accretive” – meaning that free cash flow per share for the remaining shareholders goes up. Repurchases of overvalued shares won’t achieve that. Mind you, Buffett doesn’t invest in overvalued firms.

2. Keep betting on America

Buffett’s 80-year investing tenure is – remarkably – more than one-third of America’s age and he’s sticking with his view that you don’t bet against Uncle Sam. I’ve been investing in companies around the world for one-quarter of that – an equally frightening (to me) one-twelfth of America’s age – and couldn’t agree more. There are plenty of amazing firms beyond the US’s shores, of course, but American firms just do things better, in my humble opinion. It comes down to incentives. Bosses of US firms believe in making money for themselves and their employees – and that means incentive structures are better aligned with shareholders. In some other places, wealth is embarrassing or even outright derided. Not so for those chasing the American dream.

3. Buy the business, don’t rent the stock

Buffett is one of the most vocal champions for long-term investing, allowing the power of compounding returns to work for you. After all, Buffett made 99% of his personal fortune after he’d turned 50. He says the trick to training your long-term-oriented mind is to think like a business “owner”, and not just a “renter” of its stock. And it makes sense: as a business owner, you’re likely to pay close attention to important things like management quality. And you’re more likely to be willing to ride out some tough times, believing your investment will pay off in the end.

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