Buffett’s Annual Letter
Buffett fans looking for investment lessons need look no further than his annual letter to shareholders.
Many times, Buffett followers have heard Warren say ‘I buy when things are on sale’? It’s an important lesson and one of the most difficult for investors to implement. This year’s annual letter to shareholders has good investment lessons, but hidden amidst Warren’s tales is the familiar buy-low lesson. Simply, Warren likes to buy after a market correction.
From Buffett’s annual shareholder letter:
Second paragraph – ‘Then the bubble burst, bringing price declines of 50% or more’.
Fifth paragraph – ‘Again, a bubble had popped – this one involving commercial real estate’.
Charlie Munger, Warren Buffett’s investing partner, exercises the same discipline.
Second paragraph – ‘By diving into stocks amid the market panic of 2009, Munger reaped millions in paper profits’.
PREPARE LIKE WARREN AND CHARLIE
One can bet that Warren and Charlie, at all times, have a plan that identifies targets they want to buy if the price were right. They know what they want to buy and they know the price they are prepared to pay. Individuals can learn from this by asking ‘What’s missing from my current portfolio? What would I like to add to? What would my yield be if I get my price?’ (My strategy is to buy ½ on a 10% market correction and another ½ at 20% off. See here).
Having cash is key. There is value in being a liquidity provider when sellers are under duress. Warren secured a yield of 10% on preferred shares issued by Goldman Sachs during the worst of the crash in 2009. Why? How? Goldman needed money. Warren had money.
For Individuals, cash might be 5% of their portfolio (or it might be 50% depending on investing temperament). Value investors (like Prem Watsa of Fairfax) likely have larger cash holdings currently as they typically sell into elevated markets. Institutional investors generally keep cash balances to a minimum and are fully invested per policy. The CPP had 10% money market instruments as at March 31, 2013 (pg. 86). 10% is high and is likely temporary or due to timing differences. (Cash might be short bonds as money market instruments currently pay little if any).
Finally, have patience. Buffett is 83. Munger is 89. If they can wait for a correction. So can you.
_____________________________________________________________________________________Next time? Risk Management. Doug Cronk CFA, PRM is a Pension Investment and Risk Management practitioner.