Pearls of Wisdom by Legendary Investor, Warren Buffett at Berkshire Hathaway 2018 Annual Shareholders Meeting

By Amit Rupani

The weekend of May 5, 2018 more than 40,000 people from all over the world descended on the city of Omaha, Nebraska, to attend Berkshire Hathaway's 2018 annual general meeting, otherwise known as the Woodstock of Capitalism. With what started as a humble gathering of few shareholders in an Omaha cafeteria many decades back, the Berkshire annual meeting has grown into a three-day festival crowned by a six-hour Q&A session with legendary investor Warren Buffett and his business partner Charlie Munger.

I was part of the 40,000 plus people attending the meeting and got firsthand experience of the three-day event. I consider myself as a Warren Buffett disciple and for me the six-hour Q&A session was of utmost importance. Warren and Charlie take the stage, throw it open to questions, and share pearls of wisdom by answering questions on varied topics ranging from current affairs, investments, business, economics, psychology, politics, and life in general. Below in this article I am sharing a very important equities investing lesson that Buffet had provided before the actual Q&A session started.

He started with giving a little perspective on how one might want to think about investments. He shared one of his initial lessons in the stock market where 11-year-old Warren asked his dad to buy three shares of Cities Services preferred on March 11, 1942 at $38.25, which had sold at $84 the previous year and then it was available at $38 that March. Things were bleak back in the early forties during the Second World War. But still Warren trusted his guts and invested all the savings he had accumulated in previous five years in those three shares. Some months later he sold it at about $47 and made profit of $5 per share after commission. Cities Services company shares rose after he had sold, to eventually be called by the Cities Services company for over $200 a share in few years.

He asked the audience to forget about his Cities Services example and imagine themselves back on March 11th of 1942. Things were looking terrible outside because of the Second World War and everyday newspaper headlines were filled with bad news from the Pacific and Europe. But everyone in the country knew America was going to win the war and the American system had been working well since 1776. He asked the audience to imagine a present value of $10,000 investment that was made in index fund like S&P500 in March of 1942. The only basic premise of the $10,000 investment was to hold a piece of American business through index fund, and never look at another stock quote, never listen to another person giving you advice or anything of this sort. The present value of this $10,000 investment came up to be $51 million with CAGR of 11.88% in 76 years of investment period.

“The big money is not in the buying and selling, but in the waiting." – Charlie Munger

According to Buffet, you didn't have to do anything except remain inactive and patient to make $51 million. No understanding of topics like accounting and finance were needed, no need to look at stock quotes every day, didn't have to pick out a winning stock or pick winning time, and didn't have to predict interest rates or where the dollar was headed. None of that counts at all, really, in a lifetime of investing. What counts is having a philosophy that you – that you stick with, and that you understand why you're in it, and then you forget about things that you don't know how to do. All one had to do was to figure out that America was going to do well over time, that America would overcome 1942 difficulties, and if America did well in the future, then American businesses would do well, too.

Buffet also compared his hypothetical $10,000 passive equities investment result with similar investment in gold. There were many prophets of doom and gloom around in 1942 recommending investments in gold. A gold investor would have been able to buy about 300 ounces of gold for $10,000. Today one would still have same 300 ounces of gold in safe deposit box like in 1942. It didn't produce anything while American businesses were growing all the time, new technological inventions were coming along making businesses more efficient and productive, churning out more and more money to its shareholders every year. The current value of 300 ounces of gold in 2018 is worth approximately $400,000 giving approx CAGR of 4.97%. Productive American businesses gave 100 times the value of what one has had with a nonproductive asset like gold.

According to Buffet, the overriding question for an equities investor should be, “how are American businesses going to do over your investing lifetime?" One can ask this same question for any country that is being considered for equities investment. But if one puts money in consistently over the years (systematic investment like 401k) in an index fund here in the US, there is just no comparison with owning something that doesn't produce anything. And there is no comparison with trying to jump in and out of the stocks and pay hefty transaction costs. America has been an investor's haven and you can't really fail at it unless you buy the wrong stock or get excited at the wrong time.

Happy Investing!

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Amit Rupani, CFA is an Independent Investor, practices Value Investing principles, manages money for long-term wealth creation through Equities asset class. Email: rupaniamit@yahoo.com