Earlier this week, Warren Buffett gave Fortune Magazine an exclusive clip of his annual letter to Berkshire Hathaway shareholders.
The excerpt included “fundamentals of investing” that Buffett had identified. Fortune had these five bullets (emphasis added):
- You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognise your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
- Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.
- If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am sceptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.
- With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
- Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)
Oddly, that same excerpt was formatted slightly differently in the full letter, which was released earlier today. Specifically, the Buffett’s actual letter has the paragraph following the fifth bullet bulleted itself. Fortune did not have it bulleted (see the screengrabs above).
We’re probably overthinking this. But bear with us. Here’s the bullet:
- My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following — 1987 and 1994 — was of no importance to me in making those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.
Not bulleted, this comment from Buffett can be seen as some extra context for the investments he was discussing. Bulleted, however, it effectively comes off as a sixth fundamental of investing.
“What the economy, interest rates, or the stock market might do in the years immediately following — 1987 and 1994 — was of no importance to me in making those investments,” he said. “I can’t remember what the headlines or pundits were saying at the time.”
As a “fundamental,” Buffett may be telling us that near-term moves in economic growth, rates, and stocks will mean little in the long-run.
We’ll update you if we hear back from Buffett or Fortune.